Risk parity allocates capital so each asset contributes equally to portfolio risk — not equally in dollar terms. Bonds are levered up (because they're low-risk) while equities are trimmed. Bridgewater's "All Weather" uses this approach.
Answer: Equal risk contribution from each asset. Risk parity equalises risk contribution — more low-volatility assets (bonds), less high-volatility ones (stocks).
Answer: Bonds have low volatility, so they need leverage to contribute meaningfully to risk. Bonds alone contribute little risk — leverage amplifies their contribution to match equities' risk in the portfolio.
Answer: Bull markets for stocks with rising rates. Rising rates hurt levered bonds; if stocks also rally, risk parity's bond-heavy, levered approach drags on returns.
Answer: Being designed to perform in any economic environment. All Weather spreads across economic environments (growth/recession/inflation/deflation) — hence "all weather."
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