Risk parity
A way of setting weights where every asset class contributes an equal share of total risk, rather than every class taking an equal share of the money.
How to read the number
Because bonds swing less than equities, equalising risk gives them a much larger share of the capital: by composition the portfolio looks conservative, by contribution to dispersion it is balanced.
When the metric lies
To lift a quiet class up to a risky one the approach often reaches for leverage, and with it takes on a funding risk that was not in the original idea. The weights also rest on a historical covariance matrix, with everything that implies.
Also known as: equal risk contribution