Schur Complementary Allocation: A Unification of Hierarchical Risk Parity and Minimum Variance Portfolios

Peter Cotton

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arXiv · 2411.05807

Schur Complementary Allocation: A Unification of Hierarchical Risk Parity and Minimum Variance Portfolios

Peter Cotton

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Abstract

Despite many attempts to make optimization-based portfolio construction in the spirit of Markowitz robust and approachable, it is far from universally adopted. Meanwhile, the collection of more heuristic divide-and-conquer approaches was revitalized by Lopez de Prado where Hierarchical Risk Parity (HRP) was introduced. This paper reveals the hidden connection between these seemingly disparate approaches.

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Peter Cotton. 2024-10-29. Schur Complementary Allocation: A Unification of Hierarchical Risk Parity and Minimum Variance Portfolios. https://arxiv.org/abs/2411.05807

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