Assessing the Performance of Risk Parity Strategies in the German Stock Market

This thesis provides a comprehensive empirical comparison of four prominent portfolio construction strategies—Equal Weight (EW), Minimum Variance (MV), Momentum (Mom), and Risk Parity (RP)—within the context of the German equity market. Utilizing monthly total return data for a diverse universe of 100 German stocks from February 2003 to March 2025, I conducted rigorous backtests employing standard academic methodologies, including monthly rebalancing, long-only constraints, a 36-month rolling window for covariance estimation (MV and RP), and a "12-1" signal for Momentum. The primary objective was to evaluate the absolute and risk-adjusted performance of these distinct approaches relative to each other and standard market benchmarks (DAX, MDAX, SDAX, TecDAX). The empirical results reveal significant performance differentials. The Risk Parity strategy emerged as the most effective, delivering the highest Compound Annual Growth Rate (15.27%) and superior risk-adjusted returns (Sharpe Ratio 0.83), validating the principles of risk-based diversification. The simple Equal Weight strategy also proved remarkably robust, achieving strong absolute and risk-adjusted performance (CAGR 12.90%, Sharpe Ratio 0.68) and significantly outperforming market-cap benchmarks. Conversely, the Minimum Variance strategy successfully minimized volatility (7.04%) but at the cost of substantial return potential (CAGR 3.57%). The Momentum strategy, despite using a standard "12-1" signal, exhibited considerable fragility, characterized by high volatility (21.42%), severe drawdowns (-68.46%), and an anomalous negative beta, rendering its positive alpha insufficient compensation for its risk profile. These findings suggest that, for the German equity market during the period studied, strategies emphasizing systematic diversification through either intelligent risk balancing (Risk Parity) or naive equal weighting offered significant advantages over traditional market exposure, pure volatility minimization, or the specific factor strategy tested. The research contributes practical insights into the application and relative merits of these portfolio construction techniques within a major European market.