The Blockchain Risk Parity Line: Moving From The Efficient Frontier To The Final Frontier Of Investments

ArXiv ID: 2407.09536 “View on arXiv”

Authors: Unknown

Abstract

We engineer blockchain based risk managed portfolios by creating three funds with distinct risk and return profiles: 1) Alpha - high risk portfolio; 2) Beta - mimics the wider market; and 3) Gamma - represents the risk free rate adjusted to beat inflation. Each of the sub-funds (Alpha, Beta and Gamma) provides risk parity because the weight of each asset in the corresponding portfolio is set to be inversely proportional to the risk derived from investing in that asset. This can be equivalently stated as equal risk contributions from each asset towards the overall portfolio risk. We provide detailed mechanics of combining assets - including mathematical formulations - to obtain better risk managed portfolios. The descriptions are intended to show how a risk parity based efficient frontier portfolio management engine - that caters to different risk appetites of investors by letting each individual investor select their preferred risk-return combination - can be created seamlessly on blockchain. Any Investor - using decentralized ledger technology - can select their desired level of risk, or return, and allocate their wealth accordingly among the sub funds, which balance one another under different market conditions. This evolution of the risk parity principle - resulting in a mechanism that is geared to do well under all market cycles - brings more robust performance and can be termed as conceptual parity. We have given several numerical examples that illustrate the various scenarios that arise when combining Alpha, Beta and Gamma to obtain Parity. The final investment frontier is now possible - a modification to the efficient frontier, thus becoming more than a mere theoretical construct - on blockchain since anyone from anywhere can participate at anytime to obtain wealth appreciation based on their financial goals.

Keywords: Risk Parity, Portfolio Management, Decentralized Ledger Technology (DLT), Blockchain, Efficient Frontier

Complexity vs Empirical Score

• Math Complexity: 7.0/10
• Empirical Rigor: 3.0/10
• Quadrant: Lab Rats
• Why: The paper introduces advanced mathematical concepts like risk parity, efficient frontiers, and portfolio optimization, but lacks empirical data, backtests, or implementation details, focusing instead on theoretical constructs and numerical examples.

  flowchart TD
    A["Research Goal<br/>Create risk-managed portfolios on blockchain<br/>moving from Efficient Frontier to Final Frontier"] --> B["Data Inputs<br/>Historical asset risk & return data"]
    B --> C["Methodology<br/>Apply Risk Parity: Weight assets<br/>inversely proportional to risk"]
    C --> D{"Computational Process<br/>Engineer Three Distinct Funds"}
    D --> D1["Alpha: High Risk<br/>Elevated Return"]
    D --> D2["Beta: Market Beta<br/>Mimics Wide Market"]
    D --> D3["Gamma: Risk-Free Rate<br/>Adjusted for Inflation"]
    D1 & D2 & D3 --> E["Key Findings & Outcomes<br/>1. Blockchain-based Risk Parity Portfolios<br/>2. Conceptual Parity for all market cycles<br/>3. Investors select risk/return via Sub-funds<br/>4. Final Investment Frontier realized on DLT"]