We consider two forms of volatility weighting (own volatility and underlying asset volatility) applied to cross-sectional and time-series momentum strategies. We present some simple theoretical results for the Sharpe ratios of weighted strategies and show empirical results for momentum...

The Information Ratio IR is the conventional metric to gauge the ex post risk-adjusted performance of a market timing strategy. A deficiency of this metric is that it does not account for an average “long bias”, which can confound the timing ability of the evaluated strategy. In this paper,...

We analyze the US Corporate Investment Grade (IG) credit risk premium, as represented by the average excess return of US corporate IG bonds over duration-matched US Treasuries. Over the period January 1973 through April 2018, this credit excess return averaged 60 bps p.a. (implying a stand-alone...

Solvency II has one standard equity solvency capital requirement for type 1 or developed market stocks (39 percent) and one for type 2 or emerging market stocks (49 percent). As such, differences in financial economic risk of stock portfolios within developed or emerging markets do not influence...

Risk analyses often require the revaluation of complex financial instruments over a large set of risk factor scenarios. In many instances, full revaluation is numerically intensive and hence too costly. In that case one can resort to partial revaluations using Greeks: partial derivatives of the...

The use of portfolio rebalancing as a profitable strategy (or “volatility harvesting”) is a hot topic. Indeed, it is interesting to know what the impact of periodic rebalancing is on the growth rate of a portfolio. Unfortunately, the terminology used in the literature is confusing. Terms...

The bottom-up route to portfolio diversification is clear: combining individual assets into a portfolio will lower portfolio risk. The top-down route of evaluating individual assets from the perspective of the diversified portfolio is widely applied in risk budgeting but neglected in return...

Within the finance literature there is an apparent gap between the inherent risk premium ignorance of a risk parity approach on the one hand and the assumed risk premium clairvoyance of a mean variance approach on the other. We propose a portfolio selection framework that allows an investor to...

Institutional investment decisions are generally centered around mandates, where a manager's deviation from the benchmark is controlled by means of a tracking error volatility (TEV) constraint. This constraint is of absolute nature: once imposed, it should be honored irrespective of market...

Spurred by the increased interest in applying “risk control” techniques in an asset allocation context, we offer a practitioner's review of techniques that have been newly proposed or revived from academic history. We discuss minimum variance, “1/N” or equal-weighting, maximum...