How Risk–Return Efficient Are Target Risk Strategies?

Abstract

We empirically analyze the properties of target risk strategies compared with pure index investments. We also study them in the context of popular alternative strategies such as minimum-variance and equally weighted portfolios. We document a strong (out)performance. For our sample period of about 20 years, capitalization-weighted index returns can be systematically achieved at a lower variance. However, there is a trade-off between leveraging that potentially creates higher returns and the volatility loss due to leverage that leads to an optimal risk level.

TOPICS: Mutual funds/passive investing/indexing, portfolio construction, style investing