Volatility-based position sizing

[goodgoing]

Does anyone have a good understanding of this position sizing rule:

3) Use 20-day historical volatility for risk parity position-sizing among active assets (no leverage is used). This is 1/volatility (asset A) divided by the sum of 1/volatility for all assets to determine the position size.

https://cssanalytics.wordpress.com/...llocation-portfolio-with-percentile-channels/

 

[loyek590]

I doubt anyone on this site has a good understanding of trading any active asset with "(no leverage used)".

 

[xandman]

This thread is related to the thread just above yours on "how to balance risk in a portfolio".

The risk parity name sounds nice. It's a weighting scheme. If you look at the equation, using 1/volatility (1/x) makes the formula a minimization function (as opposed to maximization functions used for returns based investing). By using the inverse of volatility, less funds are applied to values where volatility is higher.