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White Papers

Managing investment outcomes with volatility control

Approaches to portfolio construction vary considerably across investor types. However, when assessing an allocation to an asset class, most investors will give some consideration to the distribution of possible outcomes. Often, investors will use medium term historic volatility as an estimate for future volatility to estimate the distribution of future returns. However, volatility itself can vary considerably. This paper examines different types of volatility control – specifically, the volatility target, the volatility cap and the variable volatility cap – and their effect on the distribution of returns, expected returns and investment outcomes. In doing so doing, this research specifically addresses common misperceptions (and potential benefits) of these techniques.

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