Risk Parity

Risk Parity is an formulaic investing strategy that allocates capital between stocks and bonds based on the perceived risk in the financial system.

  • An offshoot of Modern Portfolio Theory
    • Assumes that bonds and stocks are negatively correlated
  • When risk increases, the model moves funds from stocks to bonds
  • When risk decreases, the model moves funds from bonds to stock
  • There are many investment funds that follow this strategy - 100s of Billions invested in this strategy (2018)

Risk Parity Criticisms

  • Only works when bonds move opposite stocks
  • If bonds are in a bear market along with stocks, the strategy fallsa part