A question for hedge fund/finance experts

Question

True or False? Risk Parity strategies seek to boost risk-adjusted returns by revising traditional asset allocation and using leverage to equalize or reduce volatility.

Answer 1

Hello,

The answer would be true. Risk Parity strategies are a common technique used in hedge funds as an adaptation to traditional MPT (modern portfolio theory). Modern portfolio theory is the widespread theory that most individuals and institutions use which involves diversifying a portfolio across asset classes to target a specific tolerance and maximize returns.

Risk Parity goes beyond traditional allocation to allow for multiple advanced products/techniques including margin and short selling in order to help reduce the risk for a given target return or increase the return for a specific level of risk tolerance.