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A proof of the optimality of volatility weighting over time

A proof of the optimality of volatility weighting over time

20-02-2012 | Investigación

We provide a proof that volatility weighting over time increases the Sharpe or Information Ratio. The higher the degree of volatility smoothing achieved by volatility weighting, the higher the risk-adjusted performance.

  • Winfried  Hallerbach
    Winfried
    Hallerbach
    Senior Quantitative Researcher

Abstract

Our results apply to risky portfolios managed against a risk free or risky benchmark (so including alpha strategies) and to volatility targeting strategies. We provide an empirical illustration of our results.

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