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Volatility Index

In: Business and Management

Submitted By AVSPPR
Words 556
Pages 3
Exploiting Volatility
In the times of recession and variability with the market getting volatile with very far glimpse of normalcy being stored, it would not be a good suggestion to just sit and watch rather it would be a better strategy to make ways to scale up the investment by learning to exploit volatility by diversifying asset allocation, rebalancing portfolio and option strategies. High return volatility definitely increases the fluctuation of the asset class weightings around the target allocation and increases the risk of significant deviation from the target but greater volatility also results in compounded returns . It is substantiated by the situation when the government is spending trillions of dollars to stimulate the growth in the economy and the corporate world is moving ahead with aggressive restructuring.
Volatility can be exploited by diversifying the portfolio with bonds as bonds and equities are well correlated and the bonds in the portfolio also dramatically reduces the risk during financial crises. There would be loss but by a lower percentage than in the situation of all equity or lower bond ratio portfolios.
The second situation is to avoid risk of market concentration when there is subsequent rise in equity market and then sudden collapse. For this systematic rebalancing is very advantageous as it reduces the downside risk by reducing volatility and investors increase long term portfolio performance by creating alpha and reducing risk. This approach requires selling stock when the price goes up and investing the proceeds to buy something that has gone down. Though it is difficult being against human instincts but can amass huge amount of money. Rebalancing is not merely related to momentum and reversal but it also leads to outperformance over the long period. It is true that sometimes an investment has 30% return and the next year it…...

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