Hello everybody! How are you? I´m new and trying to figure out a couple of things that could sound naive, so please don´t be too hard on me!
I am trying to understand an optimization algorithm to achieve risk parity in a portfolio, and need some help figuring out the notation in the following formula:
I found this on this paper: http://goo.gl/ZMEDxm
I understand the following, if you could help me by pointing any mistake, would be great!
I understand that this algorithm is suppossed to iterate the allocation for each asset at a time.
x*i : The iteration n+1 of asset i.
σi : The standard deviation of Asset i
xj : allocation for each asset j
σj : The standard deviation of asset j
ρi,j : This is my biggest question. WHAT is this?
bi : THe risk budget for the asset, which for risk parity is 1/n
σ (x) : The standard deviation of the portfolio
What am I missing? Thank you VERY MUCH guys!