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