Finance Question

In Lecture 4, we saw that the risk parity strategy would have performed very favorably in allocating funds across major asset classes, including bonds, stocks and commodities over the 1983-2014 sample. In this assignment, you will investigate whether the strategy would have performed similarly well when applied to allocating funds across different U.S. stocks only.

Assume that the portfolio is rebalanced at the end of each month. To find risk parity portfolio weights, you will need estimates of the assets’ return variances for each of the rebalancing dates. These estimates will be computed based on a rolling window of past returns.