Asset price volatility is a critical variable for the various flavors of dynamic asset allocation and related strategies. As a core input for developing risk management models, ignoring volatility is like trying to drive with your eyes closed. As a first approximation for dealing with uncertainty in finance, volatility’s an obvious resource. But volatility can be confusing if you’re not thinking clearly about what “high” and “low” vol regimes imply for expected risk and return. It doesn’t help that the vast pool of research in this area dispenses recommendations that are all over the map. Fortunately, the basic lessons can be sorted out with minimal effort.
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