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Article

Can Investing in Volatility Help Meet Your Portfolio Objectives?

Geoffrey J. Warren
The Journal of Portfolio Management Winter 2012, 38 (2) 82-98; DOI: https://doi.org/10.3905/jpm.2012.38.2.082
Geoffrey J. Warren
is a senior lecturer in the College of Business and Economics at the Australian National University in Canberra, ACT, Australia.
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  • For correspondence: geoff.warren@anu.edu.au
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Abstract

Warren evaluates investing in volatility products under a range of investor objectives, including risk and return at the total portfolio level, benchmark-relative performance, and liability-aware investing. He shows that the potential role for volatility exposure depends on investor circumstances. Long positions in forward variance swaps or longer-dated VIX futures can be effective for hedging equity-related risk within balanced portfolios, but do so at the cost of exacerbating benchmark-relative risk and may be of limited benefit in certain liability-aware situations. Investors best placed to capture the volatility risk premium through shorting volatility include those with higher tolerance for total portfolio and benchmark-relative risk, longer investment horizons, or interest rate–sensitive liabilities.

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The Journal of Portfolio Management: 38 (2)
The Journal of Portfolio Management
Vol. 38, Issue 2
Winter 2012
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Can Investing in Volatility Help Meet Your Portfolio Objectives?
Geoffrey J. Warren
The Journal of Portfolio Management Jan 2012, 38 (2) 82-98; DOI: 10.3905/jpm.2012.38.2.082

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Can Investing in Volatility Help Meet Your Portfolio Objectives?
Geoffrey J. Warren
The Journal of Portfolio Management Jan 2012, 38 (2) 82-98; DOI: 10.3905/jpm.2012.38.2.082
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  • Article
    • Abstract
    • BACKGROUND: VOLATILITY PRODUCTS AND NATURE OF VOLATILITY EXPOSURE
    • HISTORICAL PAYOFFS
    • METHOD OF ANALYSIS
    • VOLATILITY EXPOSURE AND TOTAL PORTFOLIO RISK AND RETURN
    • VOLATILITY EXPOSURE AND BENCHMARK RELATIVE PERFORMANCE
    • VOLATILITY EXPOSURE AND LIABILITY-AWARE INVESTING
    • IMPACT OF THE GFC
    • SUMMARY AND CONCLUSIONS
    • ENDNOTES
    • REFERENCES
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