This question requires you to calculate, compare and discuss two portfolios

construction techniques - (i) an Equal-Dollar Weighted portfolio and (ii) a Risk Parity portfolio.

a) What are Risk Parity portfolio and how is this portfolio different from an Equal-Dollar

weighted portfolio? Your answer should focus on the exposure to the asset classes in the

portfolio?

b) Calculate the volatility and return of an Equal-Dollar weighted portfolio that is invested

50% in US equities and 50% in Emerging market equities. Use the information (based on

a 20 year period) provided below (all figures are in annual terms):

c) Construct a Risk Parity (RP) portfolio using the two asset classes. Betas of each equity

class (against the equal weighted portfolio) are as provided in the table below. Calculate

the (i) weights for each equity class, (ii) return of this portfolio and (iii) the volatility of

this Risk parity portfolio.

d) Calculate and compare the Sharpe ratios of the two portfolios. Which portfolio

construction technique provides a (i) better diversified and a (ii) more efficient portfolio.

DATA is shown in the picture attached.