risk parity
A portfolio allocation strategy that weights assets based on equal risk contribution rather than equal capital allocation, typically resulting in more bonds and less stocks.
Example
“The risk parity fund allocated 60% to bonds and 20% to stocks by risk — not dollars — because bonds are less volatile.”
Memory Tip
RISK PARITY = equal risk from each asset, not equal dollars. Bonds get more capital because they're less risky.
Why It Matters
Risk parity helps individual investors create more balanced portfolios that are not dominated by stock market volatility. By ensuring that bonds and stocks contribute equally to overall portfolio risk, investors can potentially achieve steadier returns and better sleep at night during market downturns.
Common Misconception
Many people wrongly assume that risk parity means investing equal dollar amounts in stocks and bonds. In reality, risk parity typically requires much larger bond allocations since bonds are less volatile, so you need more of them to match the risk contribution of stocks.
In Practice
An investor with one million dollars might allocate 30 percent to stocks (about 300,000 dollars) and 70 percent to bonds (about 700,000 dollars) under a risk parity approach. Since stocks are three times more volatile than bonds, this allocation ensures that stock price swings and bond price swings contribute roughly equally to the portfolio's overall risk level.
Etymology
RISK (potential for loss) PARITY (equality). Allocating so each asset contributes equal RISK — PARITY of risk.
Common Misspellings
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See Also
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