Volatility And Asset Allocation
By James Picerno: Earlier this month I wrote about the upcoming launch of two foreign bond index funds from Vanguard—the firm’s first step into the market for international fixed-income products. Foreign bond funds are nothing new these days, although the proposed Vanguard funds are a bit out of the ordinary because the portfolios will hedge foreign exchange risk. Vanguard’s reasoning is that forex hedging dampens volatility, which is true. But as I noted, volatility per se isn’t a problem in the context of a broadly diversified multi-asset class strategy. In fact, volatility can be quite helpful in that case. Although I mentioned this point briefly, the issue deserves more attention vis-a-vis rebalancing. The basic message is that in order to capture the rebalancing bonus, a certain amount of volatility is necessary. As I noted in my book Dynamic Asset Allocation, a 1988 paper by Andre Perold and Bill Sharpe (“Dynamic Strategies for AssetComplete Story »
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