I just discovered this today:
https://www.bridgewater.com/resources/our-thoughts-about-risk-parity-and-all-weather.pdfBasically a simple stocks and bonds portfolio but leveraging up on bonds to match stock volatility. What are your thoughts?
"To understand the concept, imagine that you expect stocks to have a higher return than
bonds, but you don't want to bet everything on stocks because you could be wrong, so you
want to have a diversified portfolio of stocks and bonds. You might think that putting half
of your money in each would do the trick, but that's not true because the stocks dominate the
portfolio because they will move up and down by about twice as much as the bonds. Doing that
would also lower your expected return because you expect bonds to have a lower expected
return than stocks.
That was the dilemma faced by most investors before risk parity. On the other hand, if you lever
up the bonds to have a similar volatility, both the expected risks and the expected returns of the
bonds would increase to be more like the expected risks and returns of stocks. Doing that
levering would raise the expected return of bonds because bonds have a expected return that
is greater than cash so that borrowing cash to buy more bonds will give more of that profitable
spread. So, by doing that and by putting 50% of your money into stocks and 50% of your money into
levered bonds (which would be analogous to putting about 50% of your risk and 50% of your
expected return in each), you would be betting like amounts on each. While that leveraging up
creates increased volatility in the bond piece of the portfolio, that increased risk in bonds
can be used to reduce the risk of your portfolio."