Determinants of Levered Portfolio Performance

36 Pages Posted: 12 Jul 2013 Last revised: 21 Apr 2014

See all articles by Robert M. Anderson

Robert M. Anderson

University of California, Berkeley - Department of Economics

Stephen Bianchi

University of California, Berkeley

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

Date Written: April 20, 2014

Abstract

The cumulative return to a levered strategy is determined by five elements that fit together in a simple, useful formula. A previously undocumented element is the covariance between leverage and excess return to the fully invested source portfolio underlying the strategy. In an empirical study of volatility-targeting strategies over the 84-year period 1929-2013, this covariance accounted for a reduction in return that substantially diminished the Sharpe ratio in all cases.

Keywords: Dynamic leverage, source portfolio, transaction costs, borrowing excess return, pension funds, hedge funds, trading costs, volatility target, leverage rule

JEL Classification: E44, G11, G23

Suggested Citation

Anderson, Robert M. and Bianchi, Stephen and Goldberg, Lisa R., Determinants of Levered Portfolio Performance (April 20, 2014). Financial Analysts Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2292557 or http://dx.doi.org/10.2139/ssrn.2292557

Robert M. Anderson

University of California, Berkeley - Department of Economics ( email )

530 Evans Hall #3880
Berkeley, CA 94720-3880
United States

Stephen Bianchi

University of California, Berkeley ( email )

530 Evans Hall
MC #3880
Berkeley, CA 94720
United States

Lisa R. Goldberg (Contact Author)

University of California, Berkeley ( email )

Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

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