Equal Risk Position Sizing
Equal Risk Position Sizing uses volatility to help determine how much to invest in a certain security
- Developed by Dr. Richard Smith of TradeSmith
- Determines a trade positions size based on volatility
- Helps determine portfolio weighting in a portfolio (Equal Risk / Risk Parity)
- Suggests investing a higher $amount in securities with lower Volatility Quotients
- Example:
- Assume you have 10k to invest in two stocks and want to risk balance them
- Stock A has a Volatility Quotient of 11.4%
- Stock B has a Volatility Quotient of 73%
- You'd invest 8.69k in stock ad 1.37k in stock B to get an equally weighted position sizing based on risk