Risk-Managed Strategy Index

Abstract

In this index investing research, we studied the relationship between general market index and its historic volatility. As a result, we constructed a new type of risk managed strategy index for the index investing method. The construction method of the new strategy index is a position management method. Based on the original index, the method will increase the index portfolio size when the index volatility is low, and to reduce the index portfolio size when the index volatility is high. Comparing to the original index, the new strategy index has the property of lower volatility and higher risk-adjusted return. We also used relative volatility segmented position management method and targeted volatility position management method to analyze the risk-managed strategy index in different markets, including equity market, debt market, commodity market and FX market with focus on Chinese market. From the selected markets, we found the risk-managed strategy index can improve the risk-adjusted return in the equity market, while its performance is not so significant in other markets. We further explained the reason why the risk-managed strategy index can become more efficient in equity market.