just finished my Friday night backtests - risk parity does seem to perform pretty well a lot of the times. So when does it not?
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Each macro factor contributes some risk and some return. The goal is to have equal risk *in each factor* so you are insensitive to macro outcomes. If two assets are exposed to the same factor you have less of each of them. If they are exposed opposite, you have more of them.
eg equities and corporate credit are both exposed to real growth which justifies smaller positions than if you balanced risk among asset classes. Nominal govt bonds and commodities have opposite exposure to real growth and inflation which justifies larger positions in both.
