Home / Ideas / Equal-Risk-Contribution Risk Parity
Equal-Risk-Contribution Risk Parity
covariance-aware weights so every sleeve contributes identical portfolio risk
ERC ("true" risk parity) upgrades naive inverse-vol by using the full realized covariance matrix, so negatively/low-correlated diversifiers earn larger weights; QuantPedia reports Sharpe 1.13 vs 0.98 for naive parity and 0.67 for equal-weight on the same sleeve, with materially smaller drawdowns. Maillard, Roncalli & Teiletche prove the ERC portfolio exists, is unique, and sits between minimum-variance and equal-weight.
Universe
Same cross-asset ETF sleeve as idea 1 (SPY/EFA/IEF/TLT/GLD/DBC), 5–10 sleeves.
How it works
Each month estimate the 126-day realized covariance matrix, solve the convex ERC problem for long-only weights equalizing marginal risk contributions, rebalance monthly with a one-day lag.
Expected performance
Research-derived Sharpe estimate: 0.6–1.1.
Backtest this idea with SignalChain
This is a research lead — not a finished backtest. SignalChain takes an idea like this and runs the whole pipeline inside Claude Code: it researches the concept against academic and practitioner sources, sets benchmarks, writes and lints a VectorBT backtest, runs it, and grades the result PASS/FAIL. One command:
/signalchain equal-risk-contribution risk parity on SPY EFA IEF TLT GLD DBC using 126d realized covariance, long-only, monthly rebalance, one-day lag
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Research & sources
- papers.ssrn.com — papers.ssrn.com
- quantpedia.com — quantpedia.com
- thierry-roncalli.com — thierry-roncalli.com
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