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We have shown that incorporating a risk-control mechanism into the framework of leveraged indexes in the form of a response function that responds adversely to volatility leads to significant improvements in terms of absolute performance and Sharpe ratio.
Regarding target volatility indexes, we have shown that their long-run Sharpe ratio is always better than the Sharpe ratio of the underlying equity index as long as the target volatility level is chosen within reasonable boundaries. Further, it is interesting to note that in practical simulations, we have seen that the existing target volatility strategy comes very close to the optimal risk strategy we have derived in this paper in terms of risk and performance profile. We therefore argue that from a practitioner's point of view, existing target volatility indexes respond to volatility in an (almost) risk/return optimal way.
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1 Found with the online version of this article at http://www.indexuniverse.com/publications/journalofindexes.html