Application of Volatility in Portfolio Construction

Michael Ha¹, George Z. Liu², Lihui Zheng³

¹Department of Mathematical Sciences, Xi’an Jiaotong-Liverpool University, Suzhou, China.
²Head of Risk Strategy & Derivatives, Asia Pacific, Allianz Global Investors, Hong Kong, China.
³Head of Risk Management Department, Huatai-Pinebridge Fund Management Co. Ltd, Shanghai, China.

DOI: 10.4236/jamp.2015.37099                

Abstract

We studied the CBOE Market Volatility Index from 1995 to 2004 and the Cross-Sectional Volatility of MSCI US and MSCI AC Asia ex Japan of the same period. Tracking Error calculations and Market Volatility Analyses were performed. We selected a portfolio, Dragon, for Risk Analysis, Risk Decomposition and Risk Characteristics identification purposes. A conclusion relating Dragon’s Tracking Error and its Portfolio Size was drawn.

Keywords

Volatility, VIX, Tracking Error, Active Risk, Risk Decomposition, Risk Characteristics

Conflicts of Interest

The authors declare no conflicts of interest.

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