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Risk Diversification Strategies Comparison and Portfolio Back-testing in China

In the investment world, risk and return are the key points to evaluate the performance of a strategy. From the perspective of risk diversification, this report focused on seeking low-risk strategies to construct portfolios suitable for the Chinese market. Firstly, we introduce the framework of four risk-based strategies, including EW, MV, MDP and ERC, whose targets are risk diversification instead of excess return. Furthermore, we conducted back-testing on these four strategies mentioned based on four type of underlying assets (A-share industry index, treasury bond ETF, gold ETF, overseas index ETF). According to results, the ERC (Equal Risk Contribution) strategy worked well during 12.2013 to 06.2018, providing a 12.1% annual return with annual volatility of 0.068. Furthermore, we consider a framework to construct different portfolios based on investors’ risk appetite by targeting on the level of volatility. The empirical finding shows that the target volatility of 0.05 can lead to a 12.3% annual return with the actual portfolio volatility of 0.067. In summary, this article validated the practicability of common risk-based strategies in Chinese Market and provided two feasible low-risk strategies with about 12% annual returns.