Risk parity and volatility timing on the Johannesburg Stock Exchange
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University of Pretoria
Abstract
Risk parity has been described as a relatively new approach to portfolio creation that
has been gaining popularity (Sullivan, 2010). Under risk parity, the efficient portfolio
is created by weighting assets by their risk rather than by their market value. The
resulting risk parity portfolio is then combined with either borrowing or lending the
risk-free asset to achieve a desired mean-variance outcome.
Volatility-timing is a market timing technique that seeks to exploit a weak relationship
between short-term volatility and short-term return to improve the mean-variance
outcome of a portfolio. The study examined the effect of volatility-timing on a risk
parity portfolio to document the effect on the JSE. This serves to broaden the
understanding of volatility timing and explore practical investment opportunities.
A risk parity portfolio was created using index funds over the last 18 years to compare
performance with a 60/40 benchmark. In addition, differing methods of leverage
application were explored, including a volatility-timing method to identify an optimal
leverage methodology.
Risk parity was found to provide no risk-adjusted benefits to portfolio creation over
the 60/40 portfolio. In addition, the approach to applying leverage, including a
volatility-timed approach, provided no opportunity to capture excess returns.
Description
Mini Dissertation (MBA)--University of Pretoria, 2018.
Keywords
UCTD
Sustainable Development Goals
Citation
Gray, PJ 2018, Risk parity and volatility timing on the Johannesburg Stock Exchange, MBA Mini Dissertation, University of Pretoria, Pretoria, viewed yymmdd <http://hdl.handle.net/2263/68847>