Who this is for — Anyone building a multi-strategy portfolio who wants to avoid risk concentration. Also useful when different instruments have very different volatility.
In plain terms — Risk parity means weighting components so each contributes similarly to total risk, not to nominal capital.
Prerequisites — Complete Silver path first (min.: Position sizing, Trading plan, Drawdown, Diversification). Foundation: Bronze path.
Basic logic of the method
With equal nominal weights, the more volatile component almost always dominates the risk profile. Risk parity rebalances weights using estimated volatility and correlation. The portfolio becomes less dependent on a single market factor. The approach is an operational specialisation of Capital allocation.
Example — Two strategies: one with double the standard deviation of the other. Under parity, the first gets lower weight so its risk contribution matches the second.
Points of attention in real use
The method depends on statistical estimates that change over time and can be unstable. When correlation jumps in crises, theoretical balance can degrade quickly. Periodic rebalancing and absolute exposure limits are therefore required. In daily monitoring it should always sit alongside Aggregate risk control.
Card
- What it is: allocation criterion based on risk contribution.
- How to use it: weight components by volatility and correlation.
- Typical mistake: applying it statically without updating estimates.
Gold path — Module: Portfolio and allocation. Part of Gold path.