A Multifactor Perspective on Volatility-Managed Portfolios

50 Pages Posted: 21 Jan 2022 Last revised: 16 May 2022

See all articles by Victor DeMiguel

Victor DeMiguel

London Business School

Alberto Martin-Utrera

Iowa State University

Raman Uppal

EDHEC Business School; Centre for Economic Policy Research (CEPR)

Date Written: December 10, 2021


A fundamental insight in finance is that there is a strong risk-return tradeoff. Moreira and Muir (2017) challenge this by showing that investors can increase Sharpe ratios by reducing exposure to risk factors when their volatility is high. However, Cederburg, O'Doherty, Wang, and Yan (2020) show these strategies fail out of sample and Barroso and Detzel (2020)show they do not survive transaction costs. We propose a novel conditional multifactor portfolio whose weights on each factor change with market volatility and outperforms its unconditional counterpart even out of sample and net of costs, and during both low- and high-sentiment periods. Our results demonstrate that the breakdown of the risk-return tradeoff is even more puzzling than previously thought.

Keywords: Risk-return relation, factor timing, transaction costs, trading diversification, estimation error, sentiment.

JEL Classification: G01, G11

Suggested Citation

DeMiguel, Victor and Martin-Utrera, Alberto and Uppal, Raman, A Multifactor Perspective on Volatility-Managed Portfolios (December 10, 2021). Available at SSRN: https://ssrn.com/abstract=3982504 or http://dx.doi.org/10.2139/ssrn.3982504

Victor DeMiguel

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Alberto Martin-Utrera (Contact Author)

Iowa State University ( email )

613 Wallace Road
Ames, IA 50011-2063
United States

Raman Uppal

EDHEC Business School ( email )

58 rue du Port
Lille, 59046

Centre for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

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