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Risks 2018, 6(3), 80;

Where is the Risk Reward? The Impact of Volatility-Based Fund Classification on Performance

Arkus Financial Services, London EC3N 1LS, UK
Department IV, University of Trier, 54296 Trier, Germany
Received: 24 June 2018 / Revised: 6 August 2018 / Accepted: 8 August 2018 / Published: 13 August 2018
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This paper examines the impact of volatility-based fund classification on portfolio performance. Using historical data on equity indices, we find that a strategy based on long-term portfolio volatility, as is imposed by the Synthetic Risk Reward Indicator (SRRI), yields better Sharpe Ratios (SR) and Buy and Hold Returns (BHR) than passive investments. However, accounting for the Fama–French factors in the historical data reveals no significant alphas for the vast majority of the strategies. Further analyses conducted by running a simulation study based on a GJR(1,1)-model show no significant difference in mean returns, but significantly lower SRs for the volatility-based strategies. This evidence suggests that neither the higher leverage induced by the SRRI, nor the potential protection in downside markets pay off on a risk adjusted basis. View Full-Text
Keywords: portfolio risk; volatility; SRRI; fund performance; regulation portfolio risk; volatility; SRRI; fund performance; regulation

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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited (CC BY 4.0).

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Ewen, M. Where is the Risk Reward? The Impact of Volatility-Based Fund Classification on Performance. Risks 2018, 6, 80.

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