Volatility-Weighted Position Sizing for Multi-Asset Portfolios

Summary

The document explains how to size positions so instruments with different price volatility make more balanced contributions to portfolio risk. It first distinguishes account capital from notional exposure, including how margin and contract multipliers can make market exposure much larger than cash invested. It then describes allocating capital by average true range (ATR): divide an allocation by ATR, contract multiplier, and currency conversion to estimate positions, then scale the resulting exposures to a chosen portfolio leverage.

Worked examples use four futures contracts and four ETFs. They show that unscaled ATR-based contract counts can create extreme aggregate exposure, and demonstrate scaling those positions to fit leverage constraints. The ETF example applies the same volatility-based allocation without leverage. The approach is a heuristic for balancing volatility exposure; ATR does not capture every source of risk, and equalized component volatility does not guarantee equal returns or control correlations, gaps, liquidity, or changing market conditions. Futures contract sizes also limit how precisely allocations can be implemented.

Key ideas

• Notional exposure can substantially exceed account capital when trading on margin or using leveraged contracts.
• ATR-based sizing reduces positions in more volatile instruments and increases positions in less volatile ones.
• The proposed sizing divides an allocation by ATR, multiplier, and currency conversion.
• Scale preliminary positions to keep total exposure within a chosen leverage level.
• Volatility weighting can be applied to both futures and unleveraged stock portfolios.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.