Leverage Aversion and Risk Parity

Clifford Asness, Andrea Frazzini, Lasse Heje Pedersen

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

The authors show that leverage aversion changes the predictions of modern portfolio theory: Safer assets must offer higher risk-adjusted returns than riskier assets. Consuming the high risk-adjusted returns of safer assets requires leverage, creating an opportunity for investors with the ability to apply leverage. Risk parity portfolios exploit this opportunity by equalizing the risk allocation across asset classes, thus overweighting safer assets relative to their weight in the market portfolio.
Original languageEnglish
JournalFinancial Analysts Journal
Volume68
Issue number1
Pages (from-to)47-59
ISSN0015-198X
Publication statusPublished - 2012

Cite this

Asness, Clifford ; Frazzini, Andrea ; Heje Pedersen, Lasse. / Leverage Aversion and Risk Parity. In: Financial Analysts Journal. 2012 ; Vol. 68, No. 1. pp. 47-59.
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Asness, C, Frazzini, A & Heje Pedersen, L 2012, 'Leverage Aversion and Risk Parity', Financial Analysts Journal, vol. 68, no. 1, pp. 47-59.

Leverage Aversion and Risk Parity. / Asness, Clifford; Frazzini, Andrea; Heje Pedersen, Lasse.

In: Financial Analysts Journal, Vol. 68, No. 1, 2012, p. 47-59.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Leverage Aversion and Risk Parity

AU - Asness, Clifford

AU - Frazzini, Andrea

AU - Heje Pedersen, Lasse

PY - 2012

Y1 - 2012

N2 - The authors show that leverage aversion changes the predictions of modern portfolio theory: Safer assets must offer higher risk-adjusted returns than riskier assets. Consuming the high risk-adjusted returns of safer assets requires leverage, creating an opportunity for investors with the ability to apply leverage. Risk parity portfolios exploit this opportunity by equalizing the risk allocation across asset classes, thus overweighting safer assets relative to their weight in the market portfolio.

AB - The authors show that leverage aversion changes the predictions of modern portfolio theory: Safer assets must offer higher risk-adjusted returns than riskier assets. Consuming the high risk-adjusted returns of safer assets requires leverage, creating an opportunity for investors with the ability to apply leverage. Risk parity portfolios exploit this opportunity by equalizing the risk allocation across asset classes, thus overweighting safer assets relative to their weight in the market portfolio.

KW - Capital assets pricing model

KW - Risk assessment

KW - Capitalists & & financiers

KW - Rate of return

KW - Risk premiums

KW - Investments

KW - Success

M3 - Journal article

VL - 68

SP - 47

EP - 59

JO - Financial Analysts Journal

JF - Financial Analysts Journal

SN - 0015-198X

IS - 1

ER -