Risk parity
Quantitative Finance glossary · Derivatives Pricing & Volatility Surfaces
Definition
Portfolio construction allocating equal risk contribution (not equal dollar weight) across assets; popular institutional strategy.
Risk parity in plain English
Imagine you and a friend split a bill 50/50, but one of you ordered a $5 salad and the other a $50 steak — equal dollars, wildly unequal 'appetite.' Risk parity fixes the investing version of this: instead of putting equal MONEY into each investment, you size things so each one contributes the SAME amount of bounciness (risk) to the whole portfolio. Because a calm asset like bonds barely moves while stocks swing hard, that means holding MORE of the calm stuff and less of the wild stuff, so no single asset can dominate how much the portfolio jumps around. The idea, popular with big institutions, is a smoother, better-balanced ride rather than one asset secretly steering the whole ship.
Related Quantitative Finance terms
Quantitative Finance practice questions · Quantitative Finance flashcards · Quantitative Finance study guide