Risk Parity Allocator
Allocate capital so each asset contributes equally to portfolio risk: using volatility and correlation data.
Add at least 2 assets with volatilities to see risk parity allocations.
How It Works
Risk parity allocates capital so that each asset contributes equally to the total portfolio risk. Unlike equal-weight allocation: which gives each asset the same percentage of your capital: risk parity accounts for how assets move together through their correlation matrix. Low-volatility assets get more capital; high-volatility assets get less.
Enter each assets name and its annualized volatility (standard deviation percentage). Then fill in the correlation coefficients in the upper triangle of the matrix: these measure how assets move together. The calculator uses an iterative algorithm to find the weights where risk contribution is balanced across all assets.
The Formula
wᵢ = unscaled risk parity weight for asset i
σᵢ = volatility of asset i
ρᵢⱼ = correlation between assets i and j
C = covariance matrix: Cᵢⱼ = ρᵢⱼ × σᵢ × σⱼ
Portfolio variance: σ²ₚ = wᵀCw
Marginal risk contribution: MRCᵢ = (Cw)ᵢ / σₚ
Risk contribution: RCᵢ = wᵢ × MRCᵢ
Risk contribution %: RC%ᵢ = RCᵢ / σₚ
Iterate: wᵢ ← wᵢ × target / RC%ᵢ, then normalize
Weights are iteratively adjusted until all assets contribute equally to total portfolio risk.
FAQ
What is risk parity?
Risk parity is an allocation strategy where each asset contributes equally to the portfolios total risk, rather than an equal dollar amount. Assets with lower volatility receive higher capital allocations, while high-volatility assets are scaled down.
How is risk parity different from equal weight?
Equal weight assigns the same percentage of capital to each asset regardless of risk profile. Risk parity assigns the same percentage of risk contribution. This means lower-volatility assets get more capital, which typically results in a more balanced and stable portfolio.
What is the diversification ratio?
The diversification ratio measures how much total portfolio volatility is reduced compared to the weighted average of individual asset volatilities. A ratio above 1.0 indicates diversification benefit. Higher is better: it means the assets are not perfectly correlated.
What inputs do I need?
You need each assets annualized volatility (standard deviation of returns) and the correlation coefficients between every pair of assets. Volatility is typically 10, 40% for stocks, 20, 60% for crypto, and 3, 8% for bonds. Correlation ranges from -1 to +1.
Does it always converge?
The algorithm uses an iterative numerical method that converges for most realistic portfolios. If correlations are extreme or assets have zero volatility, it may not converge within the 200-iteration limit. The result will still be shown with a warning.
Related Tools
More portfolio tools: portfolio rebalancer, ETF overlap detector, portfolio temperature.