---
title: "Volatility target"
description: "A volatility target raises or lowers a Combined's invested portion at each rebalance to keep its volatility near a level you set, up to a maximum leverage."
canonical_url: "https://fincanva.com/docs/backtesting/volatility-target"
last_updated: "2026-09-24"
md_url: "https://fincanva.com/docs/backtesting/volatility-target.md"
---

# Volatility target

A volatility target is a setting on a Combined's allocation profile that rescales the [invested portion](/docs/backtesting/invested-portion) at every rebalance so the Combined's volatility stays close to a yearly level you choose: when the Combined has been calm it invests more, up to a maximum leverage you set, and when it has been turbulent it invests less. It keeps the risk steady rather than the amount invested — the app's note reads "Keeps risk steady, not the capital invested." It is not the same as [leverage](/docs/backtesting/leverage), which is one fixed multiplier on a strategy's positions: a volatility target changes the Combined's exposure over time, which is why it is also called dynamic leverage.

**Also seen as:** volatility targeting, vol targeting, volatility scaling, risk targeting, dynamic leverage

## How does a volatility target set the exposure?

At each rebalance a scaling factor compares the target with the volatility the Combined has actually shown, and the invested portion is multiplied by it:

$$
k = \min\!\left(\frac{\sigma^{*}}{\hat{\sigma}},\; L_{\max}\right)
\qquad
e = \min\left(p \times k,\; 300\%\right)
$$

where $\sigma^{*}$ is the **Target volatility (annual)**, $\hat{\sigma}$ is the annualised volatility of the Combined's own invested holdings — the assets it actually holds, per unit invested, measured over the **Measurement window** — whatever share of the Combined sits in cash beside them, $L_{\max}$ is the **Maximum leverage**, $p$ is the invested portion, $k$ is the scaling factor and $e$ is the effective exposure — the share of capital actually invested until the next rebalance. Because $\hat{\sigma}$ reads the holdings' own volatility rather than the scaled account, it does not move just because $k$ moved it the rebalance before: when $\hat{\sigma}$ lands back at the target, $k = 1$ and exposure returns to exactly $p$, the invested portion you set. In words: if the holdings have been twice as volatile as the target the Combined invests half as much; if they have been half as volatile it invests twice as much, but never more than the maximum leverage allows, and never more than 300% of its capital.

## How is a volatility target different from leverage?

Leverage and a volatility target both let exposure differ from capital, and they differ in what stays fixed. [Leverage](/docs/backtesting/leverage) is set once on a strategy's allocation profile and holds the same multiple of capital through calm and storm, so the strategy's risk rises and falls with the market. A volatility target sits on a Combined and moves the exposure so the *risk* stays roughly level, investing more in quiet markets and less in turbulent ones. The two can be combined: a strategy inside a Combined keeps its own leverage, and the Combined's volatility target then scales how much of the Combined's capital reaches its strategies.

## How does Fincanva handle it?

- **Where it sits.** The **Volatility target** switch is inside the invested-portion block of a Combined's allocation profile, with the help "Raises or lowers the invested portion to keep the portfolio's volatility close to the target." It belongs to the profile, so the Risk-On and Risk-Off profiles can each have their own.
- **Target volatility (annual)** runs from 2% to 40%, default 10%.
- **Maximum leverage** runs from 1× to 3×, default 1×, and never above your plan's leverage ceiling. Its help reads "How far the invested portion may rise when volatility is low. At 1× the target can only reduce it."
- **Measurement window** runs from 20 to 250 trading days, default 60 ("The trading days over which the portfolio's volatility is measured.").
- **Recalculated at every rebalance.** Between rebalances the factor stays as the last rebalance set it. Until the window holds enough history to measure the Combined's volatility, the factor is 1 and the invested portion runs unscaled.
- **Effective exposure.** Under the fields the editor shows the range the setting can produce — from 0% to the invested portion times the maximum leverage — with a sentence such as "100% × a factor from 0 to 2×, recalculated at every rebalance."
- **The 300% ceiling.** When the invested portion times the maximum leverage would exceed 300%, the editor warns "Part of the leverage will never be used" and offers a button, such as "Set 2×", that lowers the maximum leverage to the largest value that still has an effect.
- **Above 100% the Combined borrows.** Exposure above the capital is financed exactly like an [invested portion above 100%](/docs/backtesting/invested-portion) — see there for the borrowing and its cost.
- **The summary chip** under the allocation method reads, for example, "Vol target 10% (max 2×)".
- **The volatility target is included from the Advanced plan**, the first [plan level](/docs/account-security/plan-level) that includes a Combined; Free and Starter do not offer it. See [what each plan includes](/docs/account-security/what-each-plan-includes).

## What does it look like in practice?

A Combined is **50%** invested with a volatility target of **10%**, a maximum leverage of **3×** and the default 60-day window. At three rebalances the measured volatility of its holdings is different:

| Measured volatility | Factor $k$ | Effective exposure |
|---|---|---|
| 20% | 10 / 20 = 0.5 | 25% |
| 10% | 10 / 10 = 1 | 50% |
| 5% | 10 / 5 = 2 | 100% |

In the turbulent period the Combined halves its exposure, to 25%. Once the holdings' volatility lands exactly back on the 10% target, $k = 1$ and exposure returns to exactly **50%** — the invested portion you set, not 100%: the factor rescales *your own* invested portion, not the whole account. In the calm period it doubles that same 50% to 100%.

Now raise the invested portion to **150%** with the same maximum leverage of **3×**: that asks for up to 450%, above the 300% ceiling, so the editor warns that part of the leverage will never be used — at 150% the useful maximum is 2×. The numbers are illustrative, not a suggested setting.

Fincanva is for education and illustration only. It is not personalised financial advice, and past or simulated results do not predict future ones. [Read the Terms Addendum](https://fincanva.com/terms/addendum#section-3)