Risk parity is a strategy to reduce portfolio variability.
The volatility of each potential portfolio asset is assessed. Then the portfolio is constructed to achieve the overall portfolio volatility target. Leverage may be used to enhance the contribution of a particular asset (e.g. bonds) on the portfolio.
A Financial Times article in 2015 Investing: Whatever the weather? has an interesting anecdote about Ray Dalio (he built Bridgewater Associates).
McDonald’s wanted to buy chickens from its supplier at a fixed price. At the time a futures market for chickens did not exist.
Ray Dalio found that the most expensive part of producing chickens is their feed (corn and soybean meal). Ray combined these into a “synthetic” future that allowed the chicken producer to quote a fixed price to McDonald’s.
Ray Dalio refined the concept of breaking portfolio assets into their volatility and return contributions to build the successful Bridgewater Associates.
There are many strategies used to build and manage portfolios. Risk parity is one method. Depending upon the portfolio construction, it can be vulnerable in an environment of rising interest rates. Others techniques include investing in themes, investing in trends and mathematical algorithms.