A Proof of the Optimality of Volatility Weighting Over Time

23 Pages Posted: 20 Feb 2012 Last revised: 15 Aug 2014

See all articles by Winfried G. Hallerbach

Winfried G. Hallerbach

Robeco Asset Management, Quantitative Investment Research

Date Written: May 28, 2012

Abstract

We provide a proof that volatility weighting over time increases the Sharpe or Information Ratio. The higher the degree of volatility smoothing achieved by volatility weighting, the higher the risk-adjusted performance. Our results apply to risky portfolios managed against a risk free or risky benchmark (so including alpha strategies) and to volatility targeting strategies. We provide an empirical illustration of our results.

Keywords: volatility weighting, volatility targeting, risk control, Sharpe ratio, Information Ratio

JEL Classification: C58, G11

Suggested Citation

Hallerbach, Winfried George, A Proof of the Optimality of Volatility Weighting Over Time (May 28, 2012). Available at SSRN: https://ssrn.com/abstract=2008176 or http://dx.doi.org/10.2139/ssrn.2008176

Winfried George Hallerbach (Contact Author)

Robeco Asset Management, Quantitative Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands
+31102242316 (Phone)

HOME PAGE: http://www.robeco.com/quant

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