Portfolio construction under group risk parity strategy in the stock exchange of Thailand

Abstract

Risk parity strategy has been commonly applied to construct a portfolio with multiple asset classes. For single asset class, group risk parity is introduced such that risks from each group are equally contributed. This study investigates and compares performances of group risk parity strategy in Thai market under two different grouping methods which are sector and size with non-group risk parity, minimum-variance, and equal-weight strategies. The study mainly focus on two periods which are during 2016-2020 and in years with highly volatile down market. The analysis indicates that there is no clear evidence that group risk parity strategy outperforms others during 2016-2020. However, in the period with high volatility and large negative movement of the market, it is noticeable that group risk parity strategy with grouping stocks by sector outperforms others in terms of annualized return and Sharpe ratio. In conclusion, we believe that grouping stocks by sector under group risk parity strategy provides an advantage in risk return compromisation among other strategies during the volatile market.