Market cognoscenti have been highlighting the need for yield in the current low-return environment. Expectations of “lower for longer” became firmly entrenched after the June 23rd referendum by British voters to exit the European Union (“Brexit”). Assuming that an investor prefers to (or must) invest in...
Commentators discussing recent equity market underperformance have focused on the underperformance and volatility of certain industries – energy, technology and financials. Regardless of the validity of the commentary, these negative performance episodes highlight the value of assessing a portfolio’s sensitivity to industries’ returns assuming a...
The first two weeks of 2016 were the worst start to a year for the equities market since the 1930’s. We have convincingly entered a period of increased volatility which began in September 2015. When faced with increased volatility, an investor’s natural reaction might be...
Rarely. In this post, I continue to evaluate whether a zero net equity exposure portfolio (long equity exposure – short equity exposure) has less volatility than the same portfolio with non-zero net equity exposure. The first part of this study showed that applying constant positive...
In previous posts, I demonstrated that an equity long/short portfolio with a non-zero net exposure could have less return volatility than the same portfolio with net exposure equal to 0 (i.e., dollar-neutral). While lower volatility is a valuable outcome, the resulting portfolio’s sensitivity to market...
Some Common Characteristics among the 3 scenarios. In previous posts, I presented 3 equity long/short portfolios constructed based on earnings, book value, and momentum. The objective was to show that a portfolio with zero net exposure (or dollar neutral) can have realized volatility that is higher than the...
In previous posts, I presented portfolio examples based on earnings and book value to show that net exposure has risk management benefits relative to zero net exposure. This post will make it a trend with a third portfolio example based on momentum stocks – i.e.,...
As of friday, 4 Sept., the S&P 500 1-year volatility (blue) was 14.72% and the long-term average was 14.07% (red line). The 3-year volatility (purple) has not bottomed, yet. Regardless, it may be time to consider techniques for reducing the volatility inherent to some strategies. ...
The first post on this subject used an earnings-based example to show portfolios with non-zero net exposures that have lower volatilities relative to their dollar-neutral counterparts. A natural question is whether this observation is specific to the earnings-based example. This post applies the same empirical...
To better understand if the improvements are consistent over the 60-year period, let’s consider a moving average of a few risk-adjusted performance ratios: Sharpe, Sortino, and Calmar. The table shows that the low volatility portfolios have better, consistent performance for the equal- and value-weighted portfolios . To...