Talk:Risk parity

I redid this article from scratch
The old one was really a stub.AaCBrown (talk) 00:58, 26 June 2010 (UTC)

Concerns
I have issues with this article. We want to avoid WP:HOWTO and any appearance that we are giving investment advice. I'm uncomfortable with the lead being so specific about percentage gains or losses and the disclaimers and wishy washy wording violates WP:WEASEL. I think this lead and article needs some significant revision.-- — Keithbob • Talk  • 23:04, 20 May 2011 (UTC)

Content removed due to Original Research
The content below was removed because it is off topic, speculative and violates WP:OR in my opinion even though the content was created with good intentions. The relationship between the various events it highlights are not reflected in the sources as being related. In fact many of the sources do not seem mention Risk Parity. Instead I have created new content to replace it that accurately reflects sources that deal directly with Risk Parity and its history. I hope it will be a satisfactory replacement. If anyone disagrees we can discuss it and replace any content that is deemed to be reliably sourced back in to the article. Cheers!
 * The problem of optimal portfolio construction goes back to Harry Markowitz in 1952. Full Markowitz optimization suffers from two problems: the difficulty of estimating expected future returns and the tendency of the method to suggest overly concentrated portfolios. Markowitz’s ideas inspired the Capital Asset Pricing Model, which argued the optimal portfolio was to hold all assets in the proportion they exist in the market. This is particularly convenient for portfolio management, because it automatically rebalances as asset prices change, managers only have to trade in response to market events such as mergers or IPOs. However it is difficult to define market weight outside of equity markets.


 * Many people have attacked these problems in a field that came to be called “robust portfolio optimization” (robust in the sense of not being overly sensitive to the input parameters). Some popular approaches are diversity weighted indexing, fundamental indexing , minimum variance , maximum entropy and 1/N  . Several of these methods can be recast as Bayesian shrinkage . Most investors continue to use simpler ad hoc alternatives , and there is evidence that these perform as well or better.


 * Risk Parity grew out of this tradition, initially in work by Eugene Fama, David Booth and Clifford Asness in the early 1990s.-- — Keithbob • Talk  • 20:53, 21 June 2011 (UTC)

More Original Research?
I am considering removing additional content from the article. The content below contains a graphic produced by an editor and placed in the article during its early stages. I'm sure his/her actions were a good faith attempt to improve the article but the self made graphic then became a reason to add content to explain the graphic. This is also OK except that the sources used to explain the graphic do not mention Risk Parity as far as I can see. In addition, none of the articles and analysis of Risk Parity that I have read mention CAPM or discuss the Risk Parity strategy in terms of CAPM so I wonder if it is a comparion or analysis that even needs to be in the article? At present, the graphic creates a situation where the tail is wagging the dog and it appears to be Original Research WP:OR. Any thoughts from other editors?
 * [[Image:CAPM Risk Parity.JPG|thumb|250 px|Illustration of CAPM argument for Risk Parity]]


 * [One application of the Risk Parity principle is illustrated here in terms of the Capital Asset Pricing Model. In the diagram on the right, the blue region represents the feasible set, the combinations of risk and return that are attainable using unlevered portfolios of risky assets. The red dot is the portfolio of 60% stocks and 40% bonds. The yellow dot is the Risk Parity portfolio. The black line shows the combinations of risk and return theoretically possible by combining the Risk Parity portfolio with cash (below and to the left of the yellow dot) or levering up the Risk Parity portfolio (above and to the right of the yellow dot). According to the illustration, levering the Risk Parity portfolio may create a portfolio with less risk and more expected return than the 60% stock / 40% bond portfolio. According to the standard form of the Capital Asset Pricing Model, the market portfolio is the tangency portfolio, the best portfolio of risky assets to hold., Portfolio Construction & Risk Budgeting, Riskbooks, Third Edition.]Risk Parity argues this is not the case because institutional and retail investors do not hold enough commodities or real assets. Moreover only stocks are generally available in levered form because common stock is a highly-levered investment in the underlying business that often contains debt.  The market portfolio is not the tangency point, and the 60% stock / 40% bond portfolio is far from it. -- — Keithbob •  Talk  • 11:46, 26 June 2011 (UTC)
 * Since there are no objections, I have removed the content cited above based on WP:OR. -- — Keithbob • Talk  • 17:30, 30 June 2011 (UTC)

Original Author replies
I wrote an original article from a stub. I think the subsequent revisions are generally misguided as they refer to a commercial product marketed by Bridgewater (the All Weather Fund) and rely entirely on research put out by that company and some fund consultants. I believe the article should concentrate on the academic idea, which is older than the Bridgewater fund and is broader. I don't believe risk parity can be explained outside a CAPM framework. I understand the objection to using hypothetical return distributions to illustrate the claims, although I did put in disclaimers. I think the original article can be rewritten to avoid them. But the current version relies far too heavily on commercial research put out to sell a product and does not do justice to the range of the risk parity ideas.

If no one objects, I'd like to remove all commercial research from this article, and replace some of my original academic citations. There is also quite a bit of new academic work as the idea has become hot. I would like to add back the CAPM interpretation, the pre-Bridgewater history and the applications other than the All Weather Fund (question: should we mention all major risk parity funds or none? I don't think mentioning only one is a good idea).

This is a major rewrite, and I don't want to do it if it is controversial. I'll wait a while for responses. I don't intend to restore my original article, just go to something halfway in between and less commercial.

AaCBrown —Preceding undated comment added 15:59, 3 March 2012 (UTC).

Hi ACBrown, thanks for your comments and prior work on the article. I am happy to collaborate with you to improve the article. Over the past year the article has been developed quite a bit and now has been reviewed by other editors and received Good Article status which only a fraction of 1% of all the articles on Wikipedia have. That doesn't mean its perfect or that it can't be improved but doing a rewrite as you have described above seems inappropriate. It would be better to choose a specific sentence or section that you feel needs improvement and discuss together. Keep in mind that Wikipedia is based on 'reliable secondary sources' regardless of how we personally feel about those sources. On the other hand if there are additional sources that support a different view or definition of the term, those can be included. Thanks again for your interest and help. Best,-- — Keithbob • Talk  • 18:02, 3 March 2012 (UTC)

Fair enough. My overall concern is that I believe the article has morphed from a description of the academic concept of risk parity to an account of one particular commercial implementation. Academic material has been deleted, most importantly the link to the Capital Asset Pricing Model. CAPM is an academic argument for weighting investments by market capitalization, risk parity began as an alternative argument for weighting by some measure of stand-alone risk (usually standard deviation). How can you describe the reaction without mentioning what it reacted to? I think it's also important to preserve references to related ideas which come under the general heading of robust portfolio optimization. Without these links, I'm not sure risk parity deserves an article at all, it's reduced to a marketing slogan.

One possibility is to split into two articles, one on risk parity as a theoretical model and one on risk parity as a category of investment managers, just as one could have an article on the theory and history of capitalization-weighted indexing and another on the impact of the growth of index funds on the market. However that second article should not focus entirely on one company, it should either avoid naming specific funds or include a list of all major funds. And both articles should avoid references that discuss one specific fund (and especially those written by the owners of that fund), they should rely on articles that discuss risk parity in general, ideally written by disinterested parties.

I won't do any changes myself. If you agree with my view in general, I will point out the sections I feel are most problematic in the current article, and the deletions that would be most useful to restore. If you agree, or if we can come to agreement through discussion, then one or the other of us can do the painstaking work of trying to blend the changes in while keeping the article readable. If we can't agree, then I'll just leave it alone. There are plenty of articles to write or fix on Wikipedia without controversy.

I understand that Wikipedia requires reliable secondary sources rather than original research. My complaint is not that the new sources are unreliable, but that they are narrowly commercial. You wouldn't cite a Microsoft publication on the superiority of the Windows operating system to Apple software, nor write an article on operating systems that only discussed Windows. That's no reflection on Microsoft. I think the earlier charge that CAPM and robust portfolio optimatization material were original research were not complaints about the quality of the sources or lack of sources, but claims that the sources were not about risk parity. The trouble here is that in the academic literature more than five years old, "risk parity" is a very general term. The articles all use the term, but not always in the titles. For example a paper on robust portfolio optimization might mention in the text that one of the techniques studied "sometimes goes by the name of risk parity." The version of risk parity described might differ from the Bridgewater implementation, so for someone who thinks risk parity is defined by the Bridgewater version, the paper appears irrelevant.

Another possibility is to address the issue head-on and say that the largest risk parity fund goes by the name Allweather and specifically describe the Allweather idea in particular, as well as the academic idea of risk parity in general. I don't like putting so much emphasis on a commercial product, after all people who want to learn about Allweather can go to Bridgewater's website. But if the discussion is to be included, I think it's better to do it explicitly rather than slip in mentions and possibly give the impression that Allweather is the definition of risk parity.AaCBrown (talk) 18:54, 4 March 2012 (UTC)


 * I would be opposed to a split or rewrite as the current article has GA status, is not overly large and is firmly grounded in reliable sources. You can create a new article on a side topic if you like or we can include a section here. If you have issues with the mention of All Weather or Bridgewater Associates we can discuss that too and make edits to the existing copy as needed. In any case, we should deal in specifics as general discussions tend to meander and not result in much progress. Best,-- — <b style= "color:#090;">Keithbob</b> • Talk  • 20:42, 4 March 2012 (UTC)
 * Hi ACB, I have broken up your post into sections so we can discuss each point, one at a time (see below).--<span style="font-family:Comic Sans MS,sans -serif"> — <b style= "color:#090;">Keithbob</b> • Talk  • 15:19, 5 March 2012 (UTC)

Risk parity as a product

 * "I think it's also important to preserve references to related ideas which come under the general heading of robust portfolio optimization. Without these links, I'm not sure risk parity deserves an article at all, it's reduced to a marketing slogan"--AcBrown
 * Any topic that has received significant media coverage is notable by WP standards and deserves a presence on its encyclopedia. That is why we have articles on pop culture topics and products such as Shark Tank (TV series), Pokemon and RoboMop . Even if one was to consider risk parity as only an investment product used by hedge funds, it still doesn't negate its legitimacy as a stand alone article.--<span style="font-family:Comic Sans MS,sans -serif"> — <b style= "color:#090;">Keithbob</b> • Talk  • 15:19, 5 March 2012 (UTC)

Mentioning specific funds

 * "either avoid naming specific funds or include a list of all major funds"....... "The version of risk parity described might differ from the Bridgewater implementation, so for someone who thinks risk parity is defined by the Bridgewater version, the paper appears irrelevant." --AcBrown
 * "Another possibility is to address the issue head-on and say that the largest risk parity fund goes by the name Allweather and specifically describe the Allweather idea in particular, as well as the academic idea of risk parity in general. I don't like putting so much emphasis on a commercial product, after all people who want to learn about Allweather can go to Bridgewater's website. But if the discussion is to be included, I think it's better to do it explicitly rather than slip in mentions and possibly give the impression that Allweather is the definition of risk parity." AcBrown
 * All Weather fund, is mentioned because it is widely cited in reliable sources as the pioneer risk parity fund. However it may have had too much emphasis so I have removed the sentences that described the All Weather fund so that now it is just a mention of the name. Next we can add the names of other funds offered by the companies already listed in the article using reliable sources as you have suggested. This should make the situation more equitable. --<span style="font-family:Comic Sans MS,sans -serif"> — <b style= "color:#090;">Keithbob</b> • Talk  • 15:19, 5 March 2012 (UTC)

Academic History and Original Research

 * "I believe the article has morphed from a description of the academic concept of risk parity to an account of one particular commercial implementation. Academic material has been deleted, most importantly the link to the Capital Asset Pricing Model. CAPM is an academic argument for weighting investments by market capitalization, risk parity began as an alternative argument for weighting by some measure of stand-alone risk (usually standard deviation). How can you describe the reaction without mentioning what it reacted to?" ....."I think the earlier charge that CAPM and robust portfolio optimatization material were original research were not complaints about the quality of the sources or lack of sources, but claims that the sources were not about risk parity. The trouble here is that in the academic literature more than five years old, "risk parity" is a very general term. The articles all use the term, but not always in the titles. For example a paper on robust portfolio optimization might mention in the text that one of the techniques studied "sometimes goes by the name of risk parity."--AcBrown
 * That's correct, the sources for CAPM were reliable as for as I can remember, but they appeared to be original research as the articles themselves did not specifically relate their concepts to the risk parity products described in this article as far as I could see. Also, sources don't have to mention Risk Parity in the title but they do need to specifically use the term risk parity in the article and state the relationship, otherwise it is original research. If we can find sources that meet that requirement then we can expand the current History section using those sources. Keeping in mind that the reliable sources need to state 'the concept of risk parity is based on CAPM or risk parity is a reaction to the XYZ concept" otherwise it is forbidden by the WP policy WP:OR.--<span style="font-family:Comic Sans MS,sans -serif"> — <b style= "color:#090;">Keithbob</b> • Talk  • 15:19, 5 March 2012 (UTC)

Split or create a new article?
"One possibility is to split into two articles, one on risk parity as a theoretical model and one on risk parity as a category of investment managers, just as one could have an article on the theory and history of capitalization-weighted indexing and another on the impact of the growth of index funds on the market."---AcBrown
 * Maybe the creation of a new article called: Portfolio Risk Optimization or Robust Portfolio Optimization (or whatever is the industry's standard term), is the solution. Such an article could include all the related academic theories such as CAPM and could also make mention of risk parity whenever the sources state such a relationship. It's not like the term risk parity can't be used in other articles. This could be your parallel article. It would have a different name but would include wikilinks to Risk parity whenever the term is mentioned in the new article.--<span style="font-family:Comic Sans MS,sans -serif"> — <b style= "color:#090;">Keithbob</b> • Talk  • 15:19, 5 March 2012 (UTC)

I'm better at writing or rewriting than editing
So I'll leave this one alone. You're correct that the material I think is important could be put in a Robust Portfolio Optimization article. The main difference of opinion, it seems to me, is you are judging the relevance of material based on frequency of use, while I tend to consider older and more academic interpretations to be more legitimate. It's an issue that comes up a lot, whenever a technical topic starts getting marketing attention. After reading your responses, I guess "risk parity" has crossed over into the popular domain, and insisting on technical purity would now get in the way of the article. I appreciate all the time you took to respond, and also to fix the article.AaCBrown (talk) 01:28, 7 March 2012 (UTC)
 * Happy to help. Thanks for the feedback on the article. Cheers!--<span style="font-family:Comic Sans MS,sans -serif"> — <b style= "color:#090;">Keithbob</b> • Talk  • 20:53, 7 March 2012 (UTC)

Peer review
Should we subject this article to peer review? Lbertolotti (talk) 15:31, 12 August 2015 (UTC)

External links modified
Hello fellow Wikipedians,

I have just added archive links to 1 one external link on Risk parity. Please take a moment to review my edit. If necessary, add after the link to keep me from modifying it. Alternatively, you can add to keep me off the page altogether. I made the following changes:
 * Added archive http://web.archive.org/web/20140302010935/http://www.marketwatch.com/story/salient-partners-debuts-industry-first-risk-parity-index-2012-02-16 to http://www.marketwatch.com/story/salient-partners-debuts-industry-first-risk-parity-index-2012-02-16

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Cheers.—<sup style="color:green;font-family:Courier;">cyberbot II <sub style="margin-left:-14.9ex;color:green;font-family:Comic Sans MS;"> Talk to my owner :Online 02:26, 2 March 2016 (UTC)