Tuesday, September 13th @ 11:00-12:30 PM (639 Evans Hall)
Disentangling the Volatility Return: A Predictable Return Driver of Any Diversified Portfolio
Daniel Mantilla-Garcia, Optimal Asset Management
Abstract: The long-term performance of any portfolio can be decomposed as the sum of the weighted average long-term return of its assets plus the volatility return of the portfolio. The volatility return represents a larger proportion of the total return of portfolios with more homogeneous assets, such as stock factor portfolios. We unveil a direct relationship between the volatility return, and the cross-sectional variance of stock returns, as well as with the average idiosyncratic variance of the stocks in the portfolio. Furthermore, we introduce a strategy that maximizes the volatility return and finds that in portfolios of assets with similar characteristics, such as factor portfolios, the strategy yields an important increase in long-term performance and risk-adjusted return relative to market-cap-weighted factor portfolios.