What is Risk Parity?
Risk parity is a portfolio allocation strategy that distributes risk equally across assets rather than distributing capital equally. The goal is a more stable return profile across different market regimes.
The Problem with 60/40
A traditional 60/40 stock/bond portfolio allocates 60% to stocks and 40% to bonds. But stocks are far more volatile than bonds, so the portfolio risk is dominated by the equity portion — often 90%+ of total risk. Risk parity solves this by allocating more capital to lower-volatility assets (like bonds) and less to high-volatility assets (like equities or crypto) so each contributes equally to portfolio risk.
How Risk Parity Works
- Calculate each asset's volatility (standard deviation of returns).
- Assign weights inversely proportional to volatility.
- Optionally apply leverage to the lower-risk portfolio to target a desired return level.
In practice, this means a risk parity portfolio might hold 25% equities, 50% bonds, and 25% commodities — but each asset class contributes roughly one-third of the portfolio's total risk.
Risk Parity in Crypto
Crypto is highly volatile, so a risk parity approach allocates a smaller percentage to Bitcoin and Ethereum while increasing allocation to stablecoins, gold, or traditional assets. The result is a portfolio that captures crypto upside without devastating drawdowns.
Build and backtest your own risk parity portfolio with the Risk Parity Builder.