Managed Volatility: A New Approach to Equity Investing

Abstract

In this study we argue that managed-volatility equity strategies are likely to gain greater acceptance in the marketplace over time. In particular, portfolios created with the goal of maximizing total return while controlling total volatility have historically dominated cap-weighted market portfolios in both risk and return. This dominance is due to the inability of the CAPM beta to explain returns. We conclude that insurance companies as well as other liability-focused institutional investors will increasingly allocate funds to equity strategies that target low total volatility.

TOPICS: Volatility measures, performance measurement, risk management