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The Journal of Portfolio Management

The Journal of Portfolio Management

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Article

Structural Relationships and Portfolio Efficiency

Jason M. Thomas
The Journal of Portfolio Management Fall 2015, 42 (1) 135-142; DOI: https://doi.org/10.3905/jpm.2015.42.1.135
Jason M. Thomas
is managing director and director of research at The Carlyle Group L.P. in Washington, D.C. jason.thomas@carlyle.com
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Abstract

Instead of relying on inherently frail statistical relationships, investors should base portfolio construction decisions on the enduring structural relationship between risk and return. Direct investments in implied volatility indexes, such as the VIX and related contracts, can provide a perfect hedge, because increases in risk feed back into the asset’s price: when an asset’s conditional volatility increases, its price falls. Empirical results align with theory, as increases in the front-month VIX futures contract have translated to downward stock price adjustments. Data demonstrate that the VIX is a reliable proxy for the market-wide price of risk and can generally anticipate flights to safety and explain stock returns and changes in credit spreads.

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The Journal of Portfolio Management: 42 (1)
The Journal of Portfolio Management
Vol. 42, Issue 1
Fall 2015
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Structural Relationships and Portfolio Efficiency
Jason M. Thomas
The Journal of Portfolio Management Oct 2015, 42 (1) 135-142; DOI: 10.3905/jpm.2015.42.1.135

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Structural Relationships and Portfolio Efficiency
Jason M. Thomas
The Journal of Portfolio Management Oct 2015, 42 (1) 135-142; DOI: 10.3905/jpm.2015.42.1.135
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  • Article
    • Abstract
    • THE STRUCTURAL RELATIONSHIP BETWEENRISK AND RETURNS
    • VIX AS A MARKET MEASURE OF CONDITIONAL VOLATILITY
    • RELYING ON BONDS AS A HEDGE ASSET IS DANGEROUS
    • CONCLUSION
    • ENDNOTE
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