Risk Parity

Risk parity is an investment strategy that allocates capital across a portfolio based on the risk contribution of each asset rather than the traditional method of capital allocation. The goal is to equalize the risk across all assets, ensuring that no single asset or asset class dominates the overall risk of the portfolio. This approach aims to optimize the risk-adjusted return by balancing risk among equities, bonds, commodities, and other asset classes, often using leverage to achieve desired returns.

Example

In a risk parity portfolio, equities, bonds, and commodities are allocated in such a way that they contribute equally to the portfolio's overall risk, reducing the dominance of more volatile assets like stocks.