It All Together
By going through the process of selecting a diverse set of asset classes biased to outperform in different economic environments, we can mitigate the risk of our portfolio. By structuring each of these assets to have similar returns and risk as equities, we can raise the expected return of the portfolio to be competitive with equities. The combination of the two steps results in an extremely well balanced portfolio that exhibits much less risk than equities and offers high expected returns. It really is as simple as that.
In the following chapters I will walk you through a more detailed analysis of each of these asset classes and how to structure them to have comparable long‐term expected returns as equities. I will also cover additional asset classes that I excluded and the rationale for doing so. Our specific risk parity portfolio including the final allocation to each asset class will be devised as I progress through the logical sequence established to this point. I will support the allocation and conceptual framework with very long‐term returns through varying environments. I will end with implementation strategies and a description of the periods during which the risk parity portfolio could be expected to underperform.
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