Hello,
How do you interpret the formula of Risk Parity. It has a “inverted 6” in the numerator and denominator. What do they mean?
Thanks for the help.
I’ve never seen the formula (because I’ve never looked at the CAIA curriculum), but I suspect that the “inverted 6” to which you refer is properly known as a “roundback d” and looks like this: ∂.
If so, it’s the symbol for a partial derivative: a concept from multi-variable calculus.
The short answer is that you look at the variable after the ∂ in the numerator and the variable after the ∂ in the denominator. The expression means how fast the former changes when the latter changes, keeping all other variables fixed.
For a simple example, consider the formula:
d = rt
(Distance equals rate times time.)
The expression:
∂_d_/∂_r_
means “how fast distance changes when the rate changes, holding time constant”. It’s known as the partial derivative of distance with respect to rate.
Similarly, the expression:
∂_d_/∂_t_
means “how fast distance changes when time changes, holding the rate constant”. It’s known as the partial derivative of distance with respect to time.