Page 46 - 2019

Ph.D.
(Management)
MEASURING IMPACT OF RISK PARITY APPROACH
FOR EMERGING MARKET INDICES

Ph.D. Scholar : Shah Tirathank Anilbhai
Research Supervisor : Dr. Abhishek K. Parikh

Regi. No.: 16146031005
Abstract :
The quest for the better risk diversification of the portfolio has diverted research energy
on risk based asset allocation strategies especially after 2008 crisis. This study is also an
attempt to bridge the research gap as well to contribute to satiate this quest. Risk parity
approach which focusing on the equal risk contribution of every asset in the portfolio is
one of the leading risk based asset allocation strategies.

This study has focused on the application of risk parity approach on the emerging
markets namely; India and China along with the developed market US. The study has
been undertaken with two primary objectives. The first objective was to measure the
impact of change in the size defined as number of stocks in the risk parity portfolio on its’
performance with special reference to fifty stocks, seventy five stocks and hundred
stocks portfolio for all the sample markets. The second objective was to measure the
impact of market capitalization diversity of the risk parity portfolio and its’ impact on the
portfolio with special reference to multi capitalization portfolio consisting of equal portion
of large-cap, mid-cap and small-cap against the single cap portfolio which was large-cap.

The study has found statistical significant impact in both the objectives. The number of
stock holding in the risk parity portfolio may have impact on the performance of the
portfolio. The fund managers may target the size of 75 stocks or the range of around 75
stocks in the portfolio which seems to achieve optimal performance threshold on the
given performance parameters. In context with the second objective study has found that
higher market capitalization diversity of the risk parity portfolio in emerging markets
impact the performance of the portfolio positively. However, in the developed market US
the lower market cap diversity has shown better performance for risk parity portfolio.

This study’s findings may generate more interest from international institutional investors
and fund managers to implement size dimension and market cap diversity dimension in
terms of the positive impact of the risk parity approach in emerging markets. This study
may also importantly lead to creation of awareness and inclination towards adopting a
risk parity approach for domestic fund managers based at these emerging markets.

Keywords: Risk parity, emerging markets, portfolio performance

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