What are the three steps of HRP?

1) Tree clustering: build a dendrogram of asset correlations using Ward or single-linkage. 2) Quasi-diagonalization: reorder covariance matrix to group similar assets. 3) Recursive bisection: allocate weights top-down by bisecting clusters using inverse variance allocation.

Why is HRP more robust than Markowitz?

HRP does not invert the covariance matrix, avoiding amplification of estimation errors. It produces more diversified portfolios by respecting the cluster structure of asset returns.

Hierarchical Risk Parity (HRP) Clustering Calculator

Construct a Hierarchical Risk Parity portfolio using hierarchical clustering of the correlation matrix. Allocates risk based on cluster structure, robust to estimation error in expected returns.

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Frequently Asked Questions

What are the three steps of HRP?

Why is HRP more robust than Markowitz?