Portfolio evaluation volatility timing and reward to risk timing investment strategies: the Brazilian case

• Autor(a) principal: Robert Aldo Iquiapaza
• Data de Publicação: 2016
• Outros Autores: Gustavo Fiuza Costa Vaz, Sergio Louro Borges
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Institucional da UFMG
• Texto Completo: http://hdl.handle.net/1843/43363
• topic: Portfolio selection; Volatility Timing; Reward to Risk Timin; Investimentos

OBJECTIVES This research aimed to verify the performance of the Volatility Timing (VT) and Reward to Risk Timing (RRT) models of portfolio selection when compared with the Naïve and Mean-Variance ones, applied to the Brazilian stock market. METHODOLOGY The methodology consists in applying the VT, RRT, Naïve and the Mean-Variance portfolio strategies, considering different tuning levels of rebalancing portfolios. The assets employed in the analysis were those included in the Ibovespa Index in the period from January of 2004 through December of 2014. We used statistical and financial indicators to measure the performance of the strategies, and measure its turnover and transaction costs. RESULTS AND CONCLUSIONS It was possible to compare strategies against the Minimum Variance (Wvm) portfolio, the Ibovespa (Ibov) and the Naïve portfolios. The Ibov and Naïve presented the lowest portfolios returns. In the other the hand the Wvm, VT and RRT, with high investors aggressiveness in favor to less volatile assets (η=4), had the highest performance (monthly Sharpe Index 6.6%, 5.98% and 5.08%, respectively). In addition, the VT4 and the Wvm portfolios consistently preserved a low turnover. However, the RRT portfolios present- ed high turnover. Analyzed by sub-periods, the results pointed out that the best choice of portfolio de- pends upon the Brazilian economic scenario. During the first sub period RRTbm4 had the best results with 45.65% annualized return and a 223.7% Sharpe Ratio. In the second sub period the RRTk4 featured with a 21.33% annualized return and a Sharpe Ratio of 62.33%. In the last sub period, however, no strat- egies presented positive returns or Sharpe Ratios. PRACTICAL ISSUES This research evidenced that the best choice of portfolio strategies depends upon the economic setting that the Brazilian market is undergoing, because some of the strategies had better results in specific peri- ods. However, in most cases, portfolios that give more weights to less volatile assets, such as minimum variance, and volatility timing and reward to risk timing with η=4, would produce better performance (Sharpe Ratio) without significant increase in transaction costs.