A Proof of the Optimality of Volatility Weighting Over Time
23 Pages Posted: 20 Feb 2012 Last revised: 15 Aug 2014
Date Written: May 28, 2012
We provide a proof that volatility weighting over time increases the Sharpe or Information Ratio. The higher the degree of volatility smoothing achieved by volatility weighting, the higher the risk-adjusted performance. Our results apply to risky portfolios managed against a risk free or risky benchmark (so including alpha strategies) and to volatility targeting strategies. We provide an empirical illustration of our results.
Keywords: volatility weighting, volatility targeting, risk control, Sharpe ratio, Information Ratio
JEL Classification: C58, G11
Suggested Citation: Suggested Citation
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By Andrew Ang