On the Optimality of Target Volatility Strategies

Abstract

In this article, the author establishes that target volatility strategies (TVSs) may not be viable for all asset classes. Furthermore, the author provides the necessary and sufficient conditions for any asset class to be a potential candidate for a TVS. The author shows that such conditions are relevant even if returns and volatility are independent, thereby implying that an inverse relationship between volatility and returns is not necessary for the viability of TVSs. It also follows that a well-outlined dynamic TVS can achieve a higher Sharpe ratio than the static maximum Sharpe ratio portfolio.