Sizing by risk, not capital

6 min · For educational purposes only

Equal-weight allocations look balanced but aren't. Risk-weighting positions delivers genuine diversification.

A 50/50 stock-bond portfolio is not 50/50 in risk terms — stocks contribute roughly 90% of total volatility. Risk parity inverts this: weight positions by their contribution to portfolio variance, not by their dollar allocation.

For a retail investor, a usable approximation is to size positions inversely to their volatility. A US equity sleeve at 15% vol and an emerging markets sleeve at 22% vol should not be sized equally — the EM sleeve should be roughly 70% of the US sleeve in dollars to contribute the same risk.

Quick risk-budget shortcuts

Use trailing 3-year volatility as the sizing input
Cap any single satellite at 5% of total portfolio risk
Cap any single-country EM at 10% of total equity risk
Reassess sizing annually, not constantly

Key takeaways

Capital weights ≠ risk weights.
Inverse-volatility sizing is a usable retail approximation of risk parity.
Reassess annually, not at every market move.