Downside Volatility-Managed Portfolios
Journal of Portfolio Management, Forthcoming
Posted: 1 Sep 2018 Last revised: 18 May 2020
Date Written: August 22, 2018
Downside volatility and volatility typically comove but are not highly correlated during the most volatile times. We show that portfolios scaled by downside volatility expand the ex post mean-variance frontiers constructed using the original portfolios and volatility-managed portfolios of Moreira and Muir (2017), and improve the Sharpe ratios of the ex post tangency portfolios. Our results follow from the observation that downside volatility-managed portfolios are not spanned by the original portfolios or volatility-managed portfolios. Whereas downside volatility-managed portfolios expand the investment opportunity set, upside volatility-managed portfolios do not.
Keywords: volatility, portfolio management, downside volatility, asymmetry, mean variance
JEL Classification: G11, G12
Suggested Citation: Suggested Citation