Targets, Predictability, and Performance
48 Pages Posted: 21 Jan 2021
Date Written: November 11, 2020
We study market-timing strategies on a given portfolio to achieve a particular risk or return target. Targeting a constant risk level leads to increasing investment at better investment opportunities whereas targeting a constant expected return does the opposite. Theoretical and numerical analysis shows that, within the usual ranges of investment opportunities, risk targeting generates better unconditional performance than return targeting across a wide range of metrics. Empirical analysis with commonly constructed stock portfolios further highlights the practical infeasibility of return targeting due to the inherently low out-of-sample predicting power. By contrast, risk targeting tends to enhance unconditional stability and performance.
Keywords: Market Timing, Return Targeting, Risk Targeting, Mean-Variance Efficiency, Sharpe Ratio, Information Ratio, Skewness, Kurtosis
JEL Classification: G11, G12
Suggested Citation: Suggested Citation