Importance of Volatility Adjusted Sizing in Portfolio Construction

Volatility adjusted sizing is a crucial concept in portfolio construction. It involves adjusting the sizing of asset classes and positions based on their respective volatilities. For example, assets with higher volatility, like EDV, should be sized lower than assets with lower volatility, like SHY. By adjusting sizing based on volatility, investors can better manage risk and prevent excessive impact on their bottom line. It is important to review risk tolerance and establish tranches for sizing adjustments. This approach ensures that portfolio performance is not unduly affected by moves in different directions, and that assets are sized appropriately according to their volatility levels.