Targets, Predictability, and Performance

48 Pages Posted: 21 Jan 2021

See all articles by Francisco Peñaranda

Francisco Peñaranda

CUNY Queens College

Liuren Wu

City University of New York, CUNY Baruch College - Zicklin School of Business

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

Peñaranda, Francisco and Wu, Liuren, Targets, Predictability, and Performance (November 11, 2020). Available at SSRN: or

Francisco Peñaranda

CUNY Queens College ( email )

Flushing, NY 11367
United States

Liuren Wu (Contact Author)

City University of New York, CUNY Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-247
New York, NY 10010
United States
646-312-3509 (Phone)
646-312-3451 (Fax)


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