Index Fund Management by Fadi Zaher

Author:Fadi Zaher
Language: eng
Format: epub
ISBN: 9783030194000
Publisher: Springer International Publishing

6.7 Low Volatility in Asset Allocation

We all want higher returns with lower risk, but of course, the two are seen as a trade-off in traditional asset allocation as the idea is to strike a balance between risky and less risky assets, typically between stocks and bonds. An allocation of 60% to stocks and 40% to bonds is a pretty standard in the investment world for a “balanced risk” portfolio. The idea behind this typical weighting is that these two allocations (stocks and bonds)—balance each other in terms of risks. For simplicity, we present a standard asset allocation for a balanced risk portfolio of about 60% in equities and 40% in bonds and alternatives to demonstrate the impact of the low volatility factor. The low volatility factor is not a substitute for bonds but used as a substitute for some of the equity allocations in this example. Figure 6.6 shows the base asset allocation (without low volatility) and a modified asset allocation (with low volatility factor).

Fig. 6.6Balanced asset allocation with factors. Source: Author’s construction. Note: The asset allocation is a compilation of typical “balanced” portfolio allocation (base asset allocation) of Wealth Managers in the United Kingdom in 2017

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