A volatility-based deviation constraint limits each optimized position relative to its target while incorporating asset volatility. It permits larger deviations for lower-volatility assets, making the rebalancing constraint less uniform than a fixed-tolerance bound. section 13.3.2
Use it to express differentiated rebalancing tolerances:
- Compare each optimized position with its target position. section 13.3.2
- Allow lower-volatility assets to move farther from target than higher-volatility assets. section 13.3.2
- Combine the constraint with long-only and full-investment requirements in the optimization. section 13.3.2
