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Article

Same Leverage, Less Volatility: An Alternative Approach to the Construction of Leveraged Funds

Valmira Hoxhaj and Ravindra Khattree
The Journal of Index Investing Winter 2016, 7 (3) 75-94; DOI: https://doi.org/10.3905/jii.2016.7.3.075
Valmira Hoxhaj
is a statistician at Ipsos RDA in Bloomfield Hills, MI.
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  • For correspondence: hoxhaj.valmira@gmail.com
Ravindra Khattree
is a professor of statistics in the Department of Mathematics and Statistics at Oakland University in Rochester, MI.
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  • For correspondence: khattree@oakland.edu
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Abstract

This article introduces the concept of variable leverage for exchange-traded funds while keeping in mind that the target value for the leverage value is still fixed. This is done to ensure that the daily percentage hedging demand is kept constant, which in turn provides some assurance to investors that excessive buying and selling will not take place. By using simulations, the authors show that this newly constructed leveraged fund is better behaved than the usual constant multiple leveraged fund in terms of standard deviations and volatility of compounded returns.

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The Journal of Index Investing: 7 (3)
The Journal of Index Investing
Vol. 7, Issue 3
Winter 2016
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Same Leverage, Less Volatility: An Alternative Approach to the Construction of Leveraged Funds
Valmira Hoxhaj, Ravindra Khattree
The Journal of Index Investing Nov 2016, 7 (3) 75-94; DOI: 10.3905/jii.2016.7.3.075

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Same Leverage, Less Volatility: An Alternative Approach to the Construction of Leveraged Funds
Valmira Hoxhaj, Ravindra Khattree
The Journal of Index Investing Nov 2016, 7 (3) 75-94; DOI: 10.3905/jii.2016.7.3.075
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  • Article
    • Abstract
    • CONCEPTUAL FRAMEWORK OF LEVERAGED RETURNS
    • THE MECHANICS OF LEVERAGE MULTIPLES AND AN ALTERNATIVE CONSTRUCTION OF LEVERAGED FUND
    • ANALYSIS AND IMPLEMENTATION OF THE ALTERNATIVE STRATEGY
    • DYNAMICS OF VOLATILITY OF THE 2× LEVERAGED ETF AND 2× VARIABLE LEVERAGED ETF
    • PATH DEPENDENCY OF LETF’S RETURNS VERSUS INDEX
    • CONSIDERATION OF CAPITAL FLOWS
    • CONCLUDING REMARKS
    • ENDNOTE
    • REFERENCES
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  • PDF (Subscribers Only)

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