Maximizing the Volatility Return: A Risk-Based Strategy for Homogeneous Groups of Assets

Abstract

The long-term performance of any portfolio can be decomposed as the sum of the weighted average long-term return of its assets plus the volatility return of the portfolio. Hence, maximizing the volatility return of portfolios of assets with similar characteristics, such as factor portfolios, yields an important increase in performance and risk-adjusted return relative to market-cap weighted factor portfolios. Partitioning a universe of assets into homogeneous groups and applying a block-wise maximum volatility return strategy (MVR) also yields a more efficient index than standard market-cap and equal-weighted indices.

Keywords: Portfolio Optimization, Diversification, Volatility Return, Portfolio Choice

JEL Classification: G11