How to I calculate the value of c in the vol-managed equation specified by Moreira & Muir Volatilty Managed Portfolios (2016) Equation 1?

Portfolio return in month t+1 =$$\frac{c}{RV_t^2}f_{t+1}$$

where $RV^2_t$ is the Realized variance over the past month , $f_{t+1}$ is the factor return in the next month.

  • $\begingroup$ Possible duplicate of Implementing Volatility Managed Strategies $\endgroup$ – skoestlmeier Dec 8 '18 at 15:45
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    $\begingroup$ Could you please add some more information here? "C" of some 2 author paper that it not linked ... hard to follow this question .. $\endgroup$ – Ric Dec 8 '18 at 19:49

Here is a simple "how to do it" answer.

Run the Volatility Managed Strategy over some historical period using an initial guess for $c$, say $c_0=0.05$. I will call this the Trial Run.

Compute the standard deviation of the strategy returns $\sigma_0$ and the standard deviation of the buy and hold returns $\sigma_{BH}$ over the same period.

Now run the Volatility Managed Strategy again over the same period but using $c=\frac{\sigma_{BH}}{\sigma_0}c_0$. This is the final run; you can check that the standard deviation of the VMS will be exactly equal to the standard deviation of buy and hold. And you are finished.


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