Difference between PP and Risk Parity

[Hal]

Thanks Kbg,

A really good find, will have to read it carefully.
This diagram hit home....

http://www.gestaltu.com/wp-content/uplo ... erfall.png

[Kbg]

Thanks Kbg,

A really good find, will have to read it carefully.
This diagram hit home....

http://www.gestaltu.com/wp-content/uplo ... erfall.png

Yes sir, that's it in a conceptual nutshell. I've become somewhat of a believer in naive risk parity because there isn't much I haven't seen it improve.

[Mark Leavy]

Thanks Kbg,

A really good find, will have to read it carefully.
This diagram hit home....

http://www.gestaltu.com/wp-content/uplo ... erfall.png

Yes sir, that's it in a conceptual nutshell. I've become somewhat of a believer in naive risk parity because there isn't much I haven't seen it improve.

I'm also a strong believer in naive risk parity - with the exception that I prefer my measure of asset volatility to be the max historical drawdown for that asset over the longest period that I can get relevant data for.

It keeps things simple, seems a bit more relevant to my interests and the metrics don't change much over time.

[Kbg]

Thanks Kbg,

A really good find, will have to read it carefully.
This diagram hit home....

http://www.gestaltu.com/wp-content/uplo ... erfall.png

Yes sir, that's it in a conceptual nutshell. I've become somewhat of a believer in naive risk parity because there isn't much I haven't seen it improve.

I'm also a strong believer in naive risk parity - with the exception that I prefer my measure of asset volatility to be the max historical drawdown for that asset over the longest period that I can get relevant data for.

It keeps things simple, seems a bit more relevant to my interests and the metrics don't change much over time.

?

How do you apply that to day the PP? Sum the MaxDDs and then weight accordingly by the inverse?

[Mark Leavy]

How do you apply that to day the PP? Sum the MaxDDs and then weight accordingly by the inverse?

Exactly. Except for the last few years I've been applying it to my version of the 2X PP. (After being heavily influenced by you to delve deep into the mechanisms of XIV).

Allocation is (MaxDD)/sum(MaxDD)). Then normalize sum(allocations) to 1.

I run 45% Long Bonds, 35% Physical Gold, 15% XIV, 5% Cash (strictly for slop).
Rebalance when XIV hits 7.5% or 30%. Three times so far in 2.5 years.

And then outside of the portfolio, I maintain 3 years of living expenses in cash.

In rough numbers, this gives me a very good approximate 2X PP (both up and down) without running any real leverage - and still holding "safe" instruments like long bonds and physical gold.

I like using a double/halving of XIV as my rebalance trigger as it feels like I am just using Shannon's Daemon to make my bets. Roughly even odds of a double or a half - but over the long run, the doubles return more than the halves lose.

Rebalance. Ignore the portfolio. The "naive" Risk Parity keeps it relatively stable. Then when a rebalance band is hit, I check to see if my last roll of the "XIV dice" doubled or halved my bet.

[Kbg]

Cool. TMF/XIV makes for an interesting mix in a good way...