Risk Parity Investing: The Math, the Leverage It Needs, and What 2022 Showed

Risk parity sets portfolio weights so that each asset class adds about the same amount of risk, rather than the same amount of money. The idea comes from a simple observation about the classic 60% stock, 40% bond mix: it is not balanced in any sense that matters for losses, because stocks move so much more than bonds that they account for almost all the swings. Bridgewater Associates says it built its All Weather strategy in 1996 around four economic environments, with equal risk placed on each.

This guide works through the arithmetic with stated assumptions, shows how much borrowing the strategy needs, and then looks at 2022, when stocks and bonds fell together and risk parity funds lost more than a 60/40 portfolio. For the wider allocation context, see our guides to portfolio rebalancing, alternative investments, and inflation hedging.

The math of risk contribution

A portfolio's risk is the standard deviation of its returns. Each asset's share of that risk depends on its weight, its own volatility, and how it moves with the rest. For two assets, stocks (S) and bonds (B), with weights w, volatilities σ, and correlation ρ:

• Portfolio variance = (w_S × σ_S)² + (w_B × σ_B)² + 2 × ρ × w_S × w_B × σ_S × σ_B
• Stocks' share of risk = w_S × σ_S × (w_S × σ_S + ρ × w_B × σ_B) ÷ portfolio variance

Illustration: assume stocks have 16% annual volatility, bonds 6%, and a correlation of 0.2. These are round numbers chosen for the example and are not forecasts.

For two assets, equal risk contribution always means weights proportional to 1 divided by each asset's volatility, so the weights here are 6 ÷ 22 for stocks and 16 ÷ 22 for bonds, whatever the correlation. With three or more assets no such shortcut exists and the weights have to be solved numerically. The "90% of risk" figure often quoted for 60/40 depends on these inputs, and it is roughly right for reasonable stock and bond volatilities.

The leverage it needs

Balanced risk gives a portfolio with lower volatility, 6.76% in the example, and so a lower expected return than 60/40. To offer the same risk as 60/40 (10.35%), the mix has to be scaled up by 10.35 ÷ 6.76, or 1.53 times. That means holding 41.8% in stocks and 111.4% in bonds, funded by borrowing 53.1% of the portfolio's value.

Whether that pays depends on what bonds earn above the borrowing cost. Illustration: stocks are assumed to earn 4.0% a year above cash, and borrowing costs cash plus 0.5%. The table shows expected excess return over cash for each portfolio at the same 10.35% volatility.

In this example the levered portfolio breaks even with 60/40 when bonds earn roughly 1.4% a year above cash. Raising the borrowing spread from 0.5% to 1.0% takes about 0.27 percentage points a year off the levered figure, and removing it adds about the same. That is the whole bet: risk parity works if bonds pay enough over cash to make up for the borrowing cost, and it has no edge if they do not. Frazzini and Pedersen's 2014 "betting against beta" research argues that investors who cannot or will not borrow bid up riskier assets, which would leave safer ones cheap. That is an explanation of behavior, not a guarantee.

What 2022 did

In 2022 the Federal Reserve raised rates by 4.25 percentage points in nine months, according to the annual report of the RPAR Risk Parity ETF, and the fund wrote that stocks, bonds, and other asset classes all fell at the same time. The fund's 2022 annual report shows the results:

The sleeve returns are what each asset class earned inside the fund, as reported by its adviser. Risk parity is designed so that no single environment hurts. In 2022 the environment was rising inflation with rising rates, which hurt both stocks and long-dated bonds. Commodity producers rose 17.78%, and gold was flat, but neither was big enough to offset falls of about 18% to 32% in equities, long Treasuries, and long TIPS.

Illustration, using the assumptions above: the S&P 500 fell 18.11% in 2022, per the same report, and the iShares Core US Aggregate Bond ETF (AGG) fell 13.06%. A 60/40 mix of those two, rebalanced once a year, lost 16.09%. The unlevered risk parity mix of 27.3% stocks and 72.7% bonds lost 14.44%, a little less. Scaled up 1.53 times, it lost 22.11% before borrowing costs, or about 23.2% if borrowing costs 2% a year on the borrowed 53%. The real fund's result, -22.81%, fell in the same range. The lesson is that the strategy's balance held in the sense of the model, but the leverage turned a mild relative gain into a large loss, because both assets fell.

A 22.81% loss needs a gain of about 29.6% to recover. RPAR's later annual returns were +6.32% in 2023, -0.11% in 2024, and +18.28% in 2025, according to its 2025 annual report. From its December 12, 2019 start through 2025, $10,000 grew to $12,557 in the fund, against $17,462 in the 60/40 index and $23,699 in the S&P 500, or 3.83%, 9.65%, and 15.32% a year. This is a single six-year window that contains the worst year for bonds in decades, and the fund charges a management cost that the indexes do not. It is evidence that balanced risk did not deliver a smoother or better result over that period, not a verdict on the method.

When correlation changes

The stocks-and-bonds correlation is the input that matters most, and it is not stable. Holding weights fixed at the plan above and changing only the correlation:

At a correlation of 0.6, the levered portfolio's risk is 15.5% above plan, against 8.3% for 60/40. Two things follow. Risk parity concentrates the assets that diversify each other, so it is more exposed when they stop doing so. And in a two-asset portfolio, the risk shares stay 50/50 by construction, so a manager who only checks the risk-contribution table would see nothing wrong while total risk rose.

Funds and how to use them

• RPAR Risk Parity ETF. Launched in December 2019. According to its April 2026 summary prospectus, it targets equal risk in four asset classes: global equities, commodities (commodity producer stocks and gold), long-term TIPS, and US Treasuries held through futures. The target asset allocation is 25% equities, 25% commodities, 35% TIPS, and 15% Treasury bills as collateral for the Treasury futures, and the index is rebalanced quarterly. Total annual operating expenses were 0.52% in that filing.
• State Street Bridgewater All Weather ETF (ALLW). State Street's page shows a March 5, 2025 launch, Bridgewater as sub-adviser, a 0.85% gross expense ratio, $1.78 billion in assets on September 28, 2026, and a model portfolio that typically targets 10% to 12% annualized volatility. Its NAV return for the year to August 31, 2026 was 17.71%, against 22.35% for the MSCI ACWI IMI stock index. That is a short record.
• Margin at your broker. Regulation T sets initial margin at 50% for most stocks and ETFs, so 1.5 times is possible on paper. But a margin call can force sales when prices are lowest, brokers can raise requirements at any time, and margin interest is often above the cash rate. A fund's futures do not create margin calls for you, though the fund can lose more than an unlevered portfolio.
• No leverage at all. An unlevered mix of stocks, bonds, TIPS, and gold, weighted toward the lower-volatility assets, has lower risk and lower expected return. It gives up the possible return gain but avoids the borrowing risk.

Rebalance whichever version you hold on a schedule, since risk shares drift as prices move; our rebalancing guide covers the mechanics. For protection against the specific 2022 scenario, see our guides to stagflation and tail-risk hedging.

Who should skip it

• Investors who cannot tolerate a loss above what stocks alone would cause. RPAR fell more than the S&P 500 in 2022.
• Anyone who expects bonds to earn only about the cash rate. Under our assumptions, that removes the return case.
• Retirees drawing income who could be forced to sell after a year like 2022; see our retirement income guide.
• Anyone who plans to borrow on margin without knowing the broker's maintenance and house rules.

Questions to ask any risk parity product: what volatility does it target, how much leverage does it use now, what did it do in 2022, what does it cost in total, and how does it get exposure to each asset class. Advisor selection and fees are covered in our fiduciary advisor guide and wealth management fees guide.

This guide is for informational purposes only and does not constitute investment advice. Volatility, correlation, and return inputs in the illustrations are assumptions, not forecasts. Fund data are from the funds' SEC filings and issuer pages as of September 2026. Risk parity funds use leverage and can lose more than a 60/40 portfolio; past performance does not guarantee future results. Consult a qualified financial advisor before investing.