Risk Parity

Applying a risk parity approach to portfolio management, investors seek parity with regard to the risks contributed by each of the asset classes represented in the portfolio. In practice, this means taking a diversified approach to asset allocation and constantly rebalancing the portfolio depending on the volatility profiles of holdings. Parity by definition entails allocating away from asset classes that display higher volatility. The intended outcome of risk parity is smart diversification that leads to higher returns when adjusted for risk.