Managed Volatility Strategies: <i>Applications to</i><i>Investment Policy</i>

Abstract

Managed volatility strategies adjust asset allocation dynamically in anticipation of, or in response to extreme market volatility. This implies that during periods of market stress, investors can rebalance to a risk budget as an investment policy option, rather than strictly adhering to current practices that rebalance back to fixed portfolio weights. We measure the advantages of managed volatility with a multi-period model and find that the benefits increase with an investor’s ability to forecast market volatility beyond historical relationships. The practical application for investors is that a more flexible and dynamic investment policy may result in better investment outcomes. <b>TOPICS:</b>Volatility measures, portfolio construction, portfolio theory