Definition
Risk parity equalizes the risk contribution from each asset class rather than allocating equal capital. Since bonds are less volatile than stocks, risk parity typically involves overweighting bonds (often with leverage) and underweighting stocks compared to traditional portfolios. The approach was popularized by Bridgewater's All Weather fund.
lightbulb Example
Traditional 60/40: stocks contribute ~90% of portfolio risk. Risk parity: 25% stocks, 55% bonds (leveraged), 10% commodities, 10% gold—each contributing ~25% of total risk. Leverage brings total expected return to match traditional portfolios.
verified_user Key Points
- Equalizes risk contribution from each asset class
- Typically requires leverage to achieve target returns
- Less dependent on equity bull markets
- Popularized by Bridgewater All Weather fund