Risk parity.

In plain English

Risk parity sets position sizes by volatility rather than by dollars, giving calm assets larger weights and turbulent ones smaller weights so no single sleeve dominates the portfolio's swings. In a conventional 60/40 mix, stocks are far more volatile than bonds, so equities can drive the large majority of total portfolio movement despite holding a bit over half the money. Risk parity rebalances toward the quieter assets to even that out. Because the quiet assets also tend to return less, some versions borrow to raise the expected return of the whole portfolio back up. That borrowing draws the most criticism, since it turns a low-volatility design into one that depends on financing staying cheap and correlations staying put.

01Why it matters

It shows that a portfolio labeled balanced by dollar weights can be lopsided by risk, and risk is the measure that determines how it actually behaves in a downturn.

02The math, step by step

Stocks swing 16 percent a year and bonds swing 4 percent. At 60/40 the stock sleeve contributes roughly 60 times 16, or 960 units of risk, against 40 times 4, or 160, so stocks drive about 86 percent of the movement. Weighting inversely to volatility gives bonds 80 percent and stocks 20 percent, and the two contributions come out even at 320 each.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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