Risk Scaling Allocation – How It Works in Fincanva

Modified on Mon, 14 Apr at 5:43 PM

What It Is

Risk Scaling is an allocation method that adjusts position sizes based on each asset’s or model’s volatility. The objective is to prevent highly volatile components from dominating the portfolio, resulting in a more balanced and risk-aware allocation.


What It Does in Fincanva

  • Logic: Capital is allocated inversely to volatility—assets or models with lower volatility receive more capital, while riskier ones receive less

  • Simulation Behavior: At each rebalance, volatilities are estimated and weights are recalculated to reflect the inverse risk profile


Pros

  • Reduces concentration in highly volatile assets or models

  • Promotes stability and smoother equity curve over time

  • Simple and effective way to incorporate risk-awareness

  • Useful for creating conservative strategies without sacrificing diversification


Cons

  • May underweight high-return assets that also exhibit higher volatility

  • Relies on accurate and up-to-date volatility estimation

  • Does not consider correlations between assets

  • More rebalancing may be required if volatility changes frequently


Where You Can Use It

  • Portfolios: Yes - Positive weights only

  • Models: Yes


When to Use It

  • Best when building risk-aware strategies

  • Useful for investors who want to avoid overexposure to volatile assets

  • Effective for smoothing returns and reducing drawdowns

  • Ideal for conservative strategies or when combining diverse asset classes


Example
If Asset A has 30% annualized volatility and Asset B has 10%, Risk Scaling will allocate three times more capital to Asset B than to Asset A, giving preference to the lower-risk asset.

Plan Access

  • Portfolios: Available on Advanced, Ultimate, and Professional plans

  • Models: Available on Advanced, Ultimate, and Professional plans

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