Risk Parity
Risk parity balances modeled portfolio risk contributions rather than dollars, using volatility and correlation estimates with important leverage limitations.
Systematic portfolio approaches that change security weights, target factor exposures, or balance modeled risk contributions.
Systematic portfolio construction turns a stated rule into holdings and weights. Smart Beta changes index selection or weighting; Factor Investing targets defined characteristics such as value, quality, or momentum. The approaches overlap, but a shared label does not ensure identical holdings or exposures.
Risk Parity asks a different question: how much does each component contribute to modeled portfolio risk? Equal risk contributions can require unequal capital allocations. Correlation estimates and any leverage are central to interpreting the result.
These pages distinguish portfolio design from implementation. The worked examples show how weights affect returns and risk; the Smart Beta ETF guide examines the fund vehicle, trading, tracking, and costs. No weighting rule guarantees outperformance or protection from losses.
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Risk parity balances modeled portfolio risk contributions rather than dollars, using volatility and correlation estimates with important leverage limitations.
Smart beta uses rules-based index selection or weighting to change portfolio exposures, with results that depend on methodology, rebalancing, and costs.