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What is risk parity?

Risk parity

It is an approach to portfolio management strategy that is based around targeting levels of risk and equally dividing that risk across an investor's entire portfolio. This is done to achieve optimal portfolio risk diversification for individual investors.

Where have you heard about risk parity?

Introduced in 1996, there are many risk parity products available. Mutual funds and hedge funds are probably the best known. Risk parity portfolios were in the news following the 2008 financial crisis due to their weathering the storm comparatively better than traditional portfolios.

What you need to know about risk parity.

Risk parity focuses on the amount of risk in a portfolio, rather than the specific monetary amount (as is the case in traditional portfolio management). Four different aspects are considered:

Risk parity attempts to distribute risk equally across an investment portfolio with the aim being to earn the same return with less volatility, or better returns with an equal amount of risk and volatility.

Proponents of the approach state that risk parity outperforms the traditional approach during bear markets and economic downturns.

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