Risk Parity

You’re always told to diversify your portfolio. It’s the first advice you hear about investing. It’s the kind of thing your great uncle will tell you at a family reunion when he’s determined to share what little wisdom he actually has.

But what does it mean to diversify? In the risk parity model, it means allocating your portfolio on the basis of risk. Usually, this factor is measured by volatility.

Risk parity is part of modern portfolio theory. On the level of Wall Street fund managers, using the concept requires heavy-duty math to determine, quantitatively, risk/reward profiles of various investments...and then allocate funds accordingly.