Adaptive Risk Management Strategies

Published: 23 April 2024| Version 1 | DOI: 10.17632/8wbw8dzsnb.1
Sunil Maria Benedict


This data and code generate synthetic financial data and implement various portfolio management strategies. Let's break down each component: Synthetic Data Generation: Synthetic returns data for multiple assets over a specified number of periods (100 periods) is generated using the normal distribution. A covariance matrix is then calculated from these returns. Risk Parity: This strategy aims to allocate portfolio weights such that each asset contributes equally to the overall portfolio risk. The function risk_parity_weights() computes portfolio weights based on risk contributions, derived from the inverse covariance matrix. Volatility Targeting: In this strategy, the goal is to adjust portfolio weights to target a specific level of volatility (0.15 in this case). The weights are scaled based on the ratio of target volatility to the asset volatilities. Conditional Asset Allocation: A randomly generated market condition indicator is plotted over the periods. This represents a hypothetical factor that might influence asset allocation decisions based on market conditions. Adaptive Risk Management Strategies: Another randomly generated parameter, delta_X, simulates changes in asset returns. Portfolio weights are then adjusted based on these changes using an adaptive risk management approach, where weights are updated dynamically. Plotting: The results of each strategy are visualized using matplotlib. The first two subplots display the portfolio weights for risk parity and volatility targeting strategies, while the third subplot shows the market condition indicator over time. The final subplot illustrates the evolution of portfolio weights over time for the adaptive risk management strategy. Overall, this code provides a comprehensive demonstration of different portfolio management techniques, allowing for a visual comparison of their implementation and performance over time.


Steps to reproduce

import numpy as np import pandas as pd import matplotlib.pyplot as plt # Generate synthetic data np.random.seed(0) n_assets = 5 n_periods = 100 returns = np.random.normal(loc=0.05, scale=0.1, size=(n_periods, n_assets)) cov_matrix = np.cov(returns, rowvar=False) # 1. Risk Parity def risk_parity_weights(cov_matrix): inv_cov_matrix = np.linalg.inv(cov_matrix) risk_contributions =, np.transpose(inv_cov_matrix)) risk_parity_weights = risk_contributions / np.sum(risk_contributions) return risk_parity_weights rp_weights = risk_parity_weights(cov_matrix) # 2. Volatility Targeting target_volatility = 0.15 volatility = np.sqrt(np.diag(cov_matrix)) volatility_scaling = target_volatility / volatility vt_weights = volatility_scaling / np.sum(volatility_scaling) # 3. Conditional Asset Allocation (Randomly generated indicator) market_condition = np.random.rand(n_periods) # 4. Adaptive Risk Management Strategies (Randomly generated parameter) alpha = 0.05 delta_X = np.random.normal(loc=0, scale=0.1, size=n_periods) # Generate portfolio weights for adaptive risk management initial_weights = np.full(n_assets, 1 / n_assets) arm_weights = initial_weights + alpha * delta_X[:, np.newaxis] # Plotting plt.figure(figsize=(15, 12)) # 1. Risk Parity plt.subplot(2, 2, 1), rp_weights, color='b') plt.title('Risk Parity Portfolio Weights') plt.xlabel('Asset') plt.ylabel('Weight') # 2. Volatility Targeting plt.subplot(2, 2, 2), vt_weights, color='g') plt.title('Volatility Targeting Portfolio Weights') plt.xlabel('Asset') plt.ylabel('Weight') # 3. Conditional Asset Allocation plt.subplot(2, 2, 3) plt.plot(market_condition, label='Market Condition', color='r') plt.title('Market Condition Indicator') plt.xlabel('Period') plt.ylabel('Indicator') plt.legend() # 4. Adaptive Risk Management Strategies plt.subplot(2, 2, 4) for i in range(n_assets): plt.plot(arm_weights[:, i], label=f'Asset {i+1}') plt.title('Adaptive Risk Management Portfolio Weights') plt.xlabel('Period') plt.ylabel('Weight') plt.legend() plt.tight_layout()


United International Business Schools


Risk Management, Stock Exchange, Volatility, Price Volatility