Risk-Return Analysis of Dynamic Investment Strategies
29 Pages Posted: 14 Jul 2014
Date Written: June 2011
The investment management industry has developed such a wide range of trading strategies, that many investors feel lost when they have to choose the investment style that meets their requirements. Comparing these on a like-for-like basis is a difficult task about which much has been written. The scope of this paper is restricted to strategies investing in a single asset, and which are driven by the price of this asset. We show how those strategies can be fully characterised by two components: an option profile and some trading impact. The option profile depends solely on the final asset value, whereas trading impact is driven by the realised volatility. From this analysis, most of these investment strategies can be categorised in one of three families: directional, contrarian and trend-following. While directional strategies exhibit the same kind of behaviour as the underlying, contrarian and trend-following strategies exhibit asymmetric return distributions. Those asymmetric behaviours can be misleading at first sight, as a seemingly stable strategy may hide large potential losses.
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation