Risk Parity Weights

Problem

Compute two-asset risk parity weights, which are inversely proportional to volatility: w1 = (1/sigma1) / (1/sigma1 + 1/sigma2).

Return [0.5, 0.5] if both volatilities are non-positive; if only one is non-positive, assign all weight to the other asset.

Hint

Equal risk contributions mean the calmer asset gets the bigger weight.

case 1

in: [0.2,0.4]

expected: [0.6666666666666666,0.3333333333333333]

case 2

in: [0.3,0.3]

expected: [0.5,0.5]

case 3

in: [0,0.2]

expected: [0,1]

case 4

in: [0.1,0]

expected: [1,0]

Starter codePython

def risk_parity_weights(sigma1, sigma2):
    # Your code here
    pass

4 test cases · run your code against them in the editor