The analysis of risk parity and other levered strategies depends on special attribution formulas that take account of the interplay between change in leverage and returns to the underlying fully invested source portfolio. In the FAJ publication, The Determinants to Levered Portfolio Performance, it is shown that the cumulative return to a levered strategy is determined by five elements that fit together in a simple and useful formula. A previously undocumented element is the covariance between leverage and excess return to the fully invested source portfolio underlying the strategy. In an empirical study of risk parity and other volatility-targeting strategies over the 84-year period 1929–2013, this covariance accounted for a reduction in return that substantially diminished the Sharpe ratio in all cases.
Researchers affiliated with CDAR have published some of their work surrounding leverage and risk parity in the following journal articles and expert analyses:
2012 Robert M. Anderson, Stephen W. Bianchi and Lisa R. Goldberg publish “Will My Risk Parity Strategy Outperform?” in Financial Analysts Journal. The paper won a Graham and Dodd Scroll Award for 2012. (Copyright 2012, CFA Institute. Reproduced and republished from Financial Analysts Journal with permission from CFA Institute. All Rights Reserved.)
2013 Anderson, Bianchi and Goldberg publish their expert analysis “The Dynamics of Rising Interest Rates” in Bank and Lender Journal, a Westlaw journal. (Copyright 2013, Thomson Reuters. Reproduced and republished with permission from Thomson Reuters. All Rights Reserved.)
2014 Anderson, Bianchi and Goldberg publish “Determinants of Levered Portfolio Performance” in Financial Analysts Journal. (Copyright 2014, CFA Institute. Reproduced and republished from Financial Analysts Journal with permission from CFA Institute. All Rights Reserved.)