Risk Parity Allocation – How It Works in Fincanva

What It Is

Risk Parity is an allocation strategy designed to ensure that each asset or model contributes an equal share of risk to the total portfolio. Unlike traditional methods that allocate capital evenly or based on expected return, Risk Parity focuses on balancing volatility contributions—typically leading to more stable and diversified results.

What It Does in Fincanva

• Logic: Allocates more capital to low-volatility components and less to high-volatility ones, such that the contribution of each to total portfolio risk is equal

• Simulation Behavior: At each rebalance, asset or model volatilities and their correlations are used to compute allocations through a quadratic programming optimization process

Pros

• Equalizes risk exposure across components

• Reduces concentration in high-volatility positions

• Often results in more stable, lower-drawdown performance

• Aligns with institutional practices used by large asset managers and pension funds

Cons

• May allocate substantial capital to low-risk, low-return assets

• Requires accurate volatility and correlation data

• Can result in leverage if implemented with low-risk assets

• Computationally intensive compared to simpler methods

Where You Can Use It

• Portfolios: Yes - Positive weights only

• Models: Yes

When to Use It

• Best when seeking balance in risk, not capital

• Ideal for diversified, multi-asset strategies

• Useful when managing exposure across uncorrelated or variably volatile components

• Suitable for institutional-style strategies aiming for long-term consistency

Example
If Asset A has high volatility and Asset B is more stable, Risk Parity will assign less capital to Asset A and more to Asset B—so that both contribute the same amount of risk, even though their capital allocations differ.

• Portfolios: Available on Ultimate and Professional plans

• Models: Available on Ultimate and Professional plans