Volatility Managed Portfolios

Alan Moreira

Yale University

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management

October 25, 2016

Journal of Finance, Forthcoming

Managed portfolios that take less risk when volatility is high produce large alphas, substantially increase factor Sharpe ratios, and produce large utility gains for mean-variance investors. We document this for the market, value, momentum, profitability, return on equity, and investment factors in equities, as well as the currency carry trade. Volatility timing increases Sharpe ratios because changes in factors' volatilities are not fully offset by proportional changes in expected returns. Our strategy is contrary to conventional wisdom because it takes relatively less risk in recessions and crises yet still earns high average returns. This rules out typical risk-based explanations and is a challenge to structural models of time-varying expected returns.

Number of Pages in PDF File: 70

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Date posted: September 12, 2015 ; Last revised: October 28, 2016

Suggested Citation

Moreira, Alan and Muir, Tyler, Volatility Managed Portfolios (October 25, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2659431 or http://dx.doi.org/10.2139/ssrn.2659431

Contact Information

Alan Moreira
Yale University ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
2034320389 (Phone)
HOME PAGE: http://faculty.som.yale.edu/alanmoreira/index.html

Tyler Muir (Contact Author)
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
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