📝 SummarXiv

Abstract

This study applies the Hierarchical Risk Parity (HRP) portfolio allocation methodology to the NUAM market, a regional holding that integrates the markets of Chile, Colombia and Peru. As one of the first empirical analyses of HRP in this newly formed Latin American context, the paper addresses a gap in the literature on portfolio construction under cross-border, emerging market conditions. HRP leverages hierarchical clustering and recursive bisection to allocate risk in a manner that is both interpretable and robust--avoiding the need to invert the covariance matrix, a common limitation in the traditional mean-variance optimization. Using daily data from 54 constituent stocks of the MSCI NUAM Index from 2019 to 2025, we compare the performance of HRP against two standard benchmarks: an equally weighted portfolio (1/N) and a maximum Sharpe ratio portfolio. Results show that while the Max Sharpe portfolio yields the highest return, the HRP portfolio delivers a smoother risk-return profile, with lower drawdowns and tracking error. These findings highlight HRP's potential as a practical and resilient asset allocation framework for investors operating in the integrated, high-volatility markets like NUAM.