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Media type:
E-Article
Title:
Volatility-Managed Portfolios
Contributor:
MOREIRA, ALAN;
MUIR, TYLER
imprint:
Wiley Periodicals, Inc., 2017
Published in:The Journal of Finance
Language:
English
ISSN:
0022-1082;
1540-6261
Origination:
Footnote:
Description:
<p>Managed portfolios that take less risk when volatility is high produce large alphas, increase Sharpe ratios, and produce large utility gains for mean-variance investors. We document this for the market, value, momentum, profitability, return on equity, investment, and betting-against-beta factors, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in volatility are not offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions. This rules out typical risk-based explanations and is a challenge to structural models of time-varying expected returns.</p>