# Risk Parity ⎊ Area ⎊ Resource 2

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## What is the Parity of Risk Parity?

The strategic objective of allocating capital such that each distinct asset class or risk factor contributes an equal amount of risk to the total portfolio exposure, rather than equal capital. This approach often necessitates significant leverage on lower-volatility assets to match the risk contribution of higher-volatility assets like cryptocurrencies. The resulting portfolio exhibits a more balanced risk profile across different market regimes.

## What is the Risk of Risk Parity?

The primary focus of this strategy is the equalization of risk contribution, typically measured by volatility or marginal contribution to portfolio variance, across all included asset classes. In the context of crypto derivatives, this means sizing positions so that the options exposure contributes the same amount of volatility as the underlying spot holding. This contrasts sharply with traditional capital-weighted allocations.

## What is the Distribution of Risk Parity?

The resulting allocation of capital across various assets, which is inversely proportional to their individual risk metrics, leading to larger allocations in lower-risk instruments. Applying this concept to a portfolio containing both traditional assets and volatile crypto derivatives requires careful modeling of correlation and idiosyncratic risk. The final distribution is a direct output of the risk budgeting process.


---

## [Capital Preservation Strategies](https://term.greeks.live/term/capital-preservation-strategies/)

## [Loan-to-Value (LTV) Ratio](https://term.greeks.live/definition/loan-to-value-ltv-ratio/)

## [Asset Pricing](https://term.greeks.live/term/asset-pricing/)

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**Original URL:** https://term.greeks.live/area/risk-parity/resource/2/