09. Rescale Part 2

Leverage Ratio

The leverage ratio is the sum of the magnitudes of all positions, divided by the notional. The leverage ratio gives a sense of how much risk a portfolio is taking, because taking more positions magnifies both gains and losses. To standardize a factor, we divide by the sum of the magnitudes (sum of the absolute value of the positions), so that this rescaled vector's sum of magnitudes is equal to one. This makes different factors more comparable, because it's as if you're comparing different portfolios but each with the same amount of money placed on their positions.