Risk Parity
Balance a portfolio by risk contribution, not dollars, so no asset dominates.
How it works
Risk parity allocates by how much risk each asset contributes rather than how many dollars you put in it. A traditional 60/40 portfolio is dominated by equity risk because stocks are far more volatile than bonds. Risk parity instead equalizes risk across stocks, bonds, and commodities, then applies modest leverage to the lower-risk sleeves (typically bonds) so the whole portfolio still targets a reasonable return. The goal is a smoother ride that performs across many economic environments: growth, recession, inflation, deflation. Volatility targeting continuously rebalances exposures. The strategy leans heavily on bonds and leverage, and on the assumption that diversification relationships hold.
The trade-offs
✅ Strengths
- More balanced risk than dollar-weighted 60/40
- Aims to perform across multiple economic regimes
- Systematic rebalancing removes emotion
⚠️ Weaknesses
- Uses leverage, and levered bonds hurt when rates rise (e.g. 2022)
- Relies on stock-bond diversification that can break down
- Underperforms in sustained equity bull markets
Publicly associated with
Naming a practitioner is historical, educational context — never an endorsement.
Legends who play this way
Play the Risk Parity style in Conviction League
Draft a critter that trades this way, train it on a simulated market, and backtest it on the leaderboard — free and fully simulated, so there's zero real-money risk.