# Combining the risks

The **Ringo protocol** integrates three primary risk metrics—**volatility risk (Rv)**, **liquidity risk (Rl)**, and **protocol risk (Rp)**—to produce an overall risk score ( R\_{\text{total}} ). The purpose of this integration is to ensure that the protocol’s rebalancing system remains effective in dynamically adjusting asset allocations in response to market changes while maintaining a user’s risk tolerance.

**Mathematical Explanation**

The overall risk score ( R\_{\text{total}} ) is calculated using the following formula:

Rtotal=wv⋅Rv+wl⋅Rl+wp⋅RpRtotal​=wv​⋅Rv​+wl​⋅Rl​+wp​⋅Rp​

Where:

* ( w\_v ), ( w\_l ), and ( w\_p ) are the **weight coefficients** for **volatility risk**, **liquidity risk**, and **protocol risk**, respectively. These weights determine the relative importance of each risk factor in the overall risk profile.
* ( R\_v ), ( R\_l ), and ( R\_p ) are the **normalized risk scores** for volatility, liquidity, and protocol risks, respectively.

**Risk Breakdown**

**1. Volatility Risk (Rv)**

* Volatility measures market fluctuations and the potential for rapid changes in asset prices.
* If the volatility of the market is high, the risk score ( R\_v ) increases, prompting the system to adjust portfolio allocations to minimize exposure to volatile assets.

**2. Liquidity Risk (Rl)**

* Liquidity risk evaluates the ease with which assets can be bought or sold without significantly affecting the asset's price.
* High liquidity risk, where assets might be harder to sell, results in a higher ( R\_l ), triggering rebalancing to ensure the portfolio remains liquid.

**3. Protocol Risk (Rp)**

* Protocol risk evaluates the reliability and security of the protocol, considering factors like downtime, transaction errors, and overall system performance.
* A higher ( R\_p ) reflects increased protocol risk, leading to rebalancing towards safer assets or liquidity pools.

**Dynamic Allocation**

Once the overall risk score ( R\_{\text{total}} ) is calculated, it is compared against user-defined risk parameters (denoted as ( \alpha )). These parameters define the user’s risk tolerance, and the protocol adjusts the asset allocations to stay within those bounds. The protocol also employs a **dynamic allocation strategy**, which continuously evaluates current market conditions in real-time and adjusts the portfolio based on changes in volatility, liquidity, and protocol health.

This process ensures:

* **Efficient risk management**: The portfolio is constantly optimized for risk while aiming to maximize yield.
* **Adaptive behavior**: The system responds to market changes and risk factors, ensuring the portfolio is always aligned with user expectations and risk tolerance.

**Summary**

By combining these individual risk metrics into an overall risk score, the Ringo protocol can make informed decisions about asset allocation and rebalancing. This approach allows the Ringo engine to balance yield generation with risk management, providing users with an optimized investment experience based on their specific risk preferences.
