Question

Which of the following statements is incorrect regarding Risk Parity portfolios and Risk Allocated portfolios?

A) Risk Parity portfolio ensure that the marginal contribution to risk is equal for each asset in the portfolio. Risk allocated portfolios ensure that investments with the highest risk have the highest allocation.

B) Both allocation methods allocate risk based on a pre-determined basis.

C) Once portfolios are constructed based on either methodologies, one methodology may result in a more efficient allocation than the other.

D) Once portfolios are constructed based on either methodologies, one methodology may result in lower overall risk than the other.

E) Once portfolios are constructed based on either methodologies, one methodology may result in a higher overall return than the other.

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Answer 1

Answer.

Option A is Incorrect because of,

The risk parity approach to portfolio construction seeks to allocate the capital in a portfolio based on a risk-weighted basis and not an equal basis.

And Risk allocated portfolios ensure that investments with the highest risk have the highest allocation it is incorrect because of

• The percentage of your portfolio you devote to each depends on your time frame and your tolerance for risk.
• If the tolerance level is high then investors can allocate the highest allocation in the highest risk shares.