Help understanding this formula: Risk Parity Algorithm

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Help understanding this formula: Risk Parity Algorithm

Postby niangari » Wed Jun 15, 2016 11:27 pm

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:

Image

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!
niangari
 
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