A Portfolio of Stocks and Volatility

Abstract

Purchasing volatility to add to a S&P 500 stock portfolio substantially reduces risk without having much effect on return. This article examines the risk and return properties of the VIX, S&P 500 stock portfolio, and a Markowitz combination of these assets, showing the risk-return benefits of including volatility as an asset. Since the daily correlation between the S&P and VIX assets ranges from –.45 to –.82, there are significant benefits to adding volatility to a portfolio of stocks. Purchasing volatility is now possible via exchange traded futures contracts or over-the-counter instruments.