An Asset Allocation Primer: Connecting Markowitz, Kelly and Risk Parity


As curious as it may sound, few asset allocation primers describe portfolio models while connecting them to each other. This article does so by describing and contrasting the mechanics of standard asset allocation models, including the utility-based, Markowitz, Kelly, risk parity and fixed allocation approaches. It seeks to accomplish four objectives: First, it develops the mathematics of the models; second, it identifies the precise conditions under which the models are equivalent; third, it discusses the specifics – risk/return characteristics – of each approach; and last, it provides numerical examples that compare allocations to asset classes and return and risk measures for various models.