Risk parity allocates capital so that each asset contributes equally to total portfolio risk:
In a stock/bond portfolio, equities typically contribute of the risk. Risk parity flips this: weight bonds heavier so each asset's risk contribution is balanced.
Pros: more diversified by risk, often a smoother return profile, less concentrated in any single risk source. Cons: typically uses leverage (bonds need to be levered up to match equity volatility), sensitive to interest-rate shocks, performance can suffer in regime changes (e.g. when rates rise broadly).
Bridgewater's All Weather is the most famous risk-parity portfolio. The idea generalizes to factor risk parity (equal contribution from each macro factor) and "hierarchical" risk parity that accounts for correlations.