Risk Parity
Also called: risk parity portfolio, equal risk contribution
Risk parity allocates so each asset contributes equally to portfolio risk, rather than equal dollars. Because equities dominate the risk of a conventional 60/40 portfolio, the result is a much larger bond weight, then leverage applied to bring expected return back up. It performed superbly through four decades of falling rates and badly in 2022, when leveraged bonds and equities fell together — the correlation assumption underneath it failing exactly when it mattered.
Want more than a definition? Learn it in Risk Arena →