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The Journal of Portfolio Management

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The Impact of Volatility Targeting

Campbell R. Harvey, Edward Hoyle, Russell Korgaonkar, Sandy Rattray, Matthew Sargaison and Otto Van Hemert
The Journal of Portfolio Management Fall 2018, 45 (1) 14-33; DOI: https://doi.org/10.3905/jpm.2018.45.1.014
Campbell R. Harvey
is a professor of finance at Duke University in Durham, NC, and an advisor to Man Group in London, UK
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Edward Hoyle
is a senior quantitative analyst at Man AHL in London, UK
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Russell Korgaonkar
is the director of investment strategies at Man AHL in London, UK
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Sandy Rattray
is the chief investment officer of the Man Group in London, UK
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Matthew Sargaison
is the co-chief executive officer of Man AHL in London, UK
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Otto Van Hemert
is the head of macro research at Man AHL in London, UK
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Abstract

Recent studies show that volatility-managed equity portfolios realize higher Sharpe ratios than portfolios with a constant notional exposure. The authors show that this result only holds for risk assets, such as equity and credit, and they link this finding to the so-called leverage effect for those assets. In contrast, for bonds, currencies, and commodities, the impact of volatility targeting on the Sharpe ratio is negligible. However, the impact of volatility targeting goes beyond the Sharpe ratio: It reduces the likelihood of extreme returns across all asset classes. Particularly relevant for investors, left-tail events tend to be less severe because they typically occur at times of elevated volatility, when a target-volatility portfolio has a relatively small notional exposure. We also consider the popular 60–40 equity–bond balanced portfolio and an equity–bond–credit–commodity risk parity portfolio. Volatility scaling at both the asset and portfolio level improves Sharpe ratios and reduces the likelihood of tail events.

TOPICS: Portfolio construction, tail risks, volatility measures

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The Journal of Portfolio Management: 45 (1)
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Fall 2018
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The Impact of Volatility Targeting
Campbell R. Harvey, Edward Hoyle, Russell Korgaonkar, Sandy Rattray, Matthew Sargaison, Otto Van Hemert
The Journal of Portfolio Management Oct 2018, 45 (1) 14-33; DOI: 10.3905/jpm.2018.45.1.014

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The Impact of Volatility Targeting
Campbell R. Harvey, Edward Hoyle, Russell Korgaonkar, Sandy Rattray, Matthew Sargaison, Otto Van Hemert
The Journal of Portfolio Management Oct 2018, 45 (1) 14-33; DOI: 10.3905/jpm.2018.45.1.014
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  • Article
    • Abstract
    • PRELIMINARIES
    • U.S. EQUITIES
    • OTHER ASSETS
    • WHY DOES VOLATILITY SCALING PARTICULARLY IMPROVE THE SHARPE RATIO OF RISK ASSETS?
    • CONCLUDING REMARKS
    • ACKNOWLEDGMENTS
    • ENDNOTES
    • REFERENCES
  • Supplemental
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