Risk Parity Approach
The paper assigns portfolio weights proportional to the inverse of observed volatility. In other words, at the end of each month we calculate the volatility of the asset over last one year and inverse of that is the portfolio weight for that asset for that month.
Trend Following Approach
Under this approach, buy an asset if the asset class price is above X-month moving average. Sell the asset, if price is below the X-month average and invest the proceeds in US 3-month Treasury bills. Signals are determined on end of month basis. No shorts. Only buys.
Finally, each asset class has an equal weight in the portfolio. That means if all 5 assets price is above X-month moving average, then each asset gets 20% of the portfolio weight. Instead, if only 3 assets has price above the moving average, then each of those 3 assets gets 20% of portfolio with rest in 3-month Treasury bills.
Momentum ApproachUnder this approach, at the end of each month all the asset classes are ranked based on their performance over last 12 months. Then buy the top quarter of the ranked assets and sell any assets in portfolio that are not in top quarter. Repeat this every month.
Another alternative is to buy the top half of the ranked assets and sell any assets that are not in top quarter. Finally each asset class has an equal weight in the portfolio.
The table provides performance stats for (a) 5 assets classes (i.e., benchmark returns) (b) performance stats for Trend following approach, (c) performance stats for Risk Parity approach and (d) Risk Parity with trend following. Additional details are on the table itself along with my annotations.
This paper has additional concepts and tables. Covering them will require couple more posts. If you cannot wait then following is the link to the journal paper.
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