Risk budget
Volatility target, VaR limit, position size, drawdown stop.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: risk budget.Updated 30 October 2026
What it does
The limits that decide how much risk the capital carries. A volatility target says how much the returns on capital may swing; a daily VaR limit can cap it; position size is the volatility used divided by the volatility of what is traded. The expected return follows from a Sharpe ratio and that volatility, and a maximum drawdown limit, measured on the strategy’s own index, stops trading when the strategy has lost too much from its peak.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, rows 19–33: Sharpe ratio, base, Sharpe ratio, upside, Volatility target, annual, Volatility of the instruments traded, annual…
- Risk Budget, rows 6–7: Gross return, Net return after trading costs
- Risk Budget, rows 10–16: Trading this month, Strategy index, net of trading costs, Peak of the index, Drawdown from the peak…
What a reviewer looks for
- A return assumed without the volatility it needs.
- A VaR limit that the position size breaches because the two were set separately.
- A drawdown measured on capital after living costs, so the draw trips the risk limit.
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Vocabulary: VaR (Value at Risk), Sharpe Ratio, Drawdown, Position Sizing.