A Framework for Constructing Equity-Risk-Mitigation Portfolios. Issue 3 (23rd July 2020)

• Record Type: Journal Article
• Authors: Baz, Jamil; Davis, Josh; Sapra, Steve; Gillmann, Normane; Tsai, Jerry
• Is Part Of: Financial analysts journal. Volume 76:Issue 3(2020)
• Page Start: 81
• Page End: 98
• Publication Date: 2020-07-23
• Subjects: Investment analysis -- Periodicals; Investment analysis; HW_FM; Periodicals; Electronic journals; 332.6
• DOI: 10.1080/0015198X.2020.1758502
• Languages: English
• ISSNs: 0015-198X

Abstract

Abstract : The key trade-off among equity-risk-mitigation strategies is their expected return versus their ability to diversify equity risk. In particular, the more reliable a strategy's equity-hedging properties, the lower its expected return, and vice versa. This article proposes a framework for optimal equity-risk-mitigation portfolio construction. In our model, the investor maximizes the portfolio's unconditional expected return, subject to a constraint on its conditional equity beta. We show that the return to a risk-mitigation portfolio can be decomposed into hedging and return- generating components. We then demonstrate that optimal risk-mitigation portfolios exhibit better return-defensiveness properties relative to the underlying strategies. Abstract : Disclosure: The authors report no conflicts of interest. Editor's Note Submitted 17 June 2019 Accepted 14 April 2020 by Stephen J. Brown