Advanced index concepts which try to optimize the risk/return profile and protect investors from losses have recently gained popularity. As a new approach the so-called target risk or risk control strategy defines ex-ante a risk level, where portfolio’s assets are regularly reallocated between a risk-free and risky asset so that overall portfolio’s volatility matches the predefined target risk. This paper empirically analyzes target risk strategies of EURO STOXX 50 stock market indices in the context of alternative optimization approaches such as minimum-variance-based and equally-weighted indices. Empirical evidence shows that target risk strategies are more risk-return efficient than the capital-weighted benchmark. Compared to a minimum variance the risk control strategies exhibit by far more stable risk levels over time and clearly outperform the naïve portfolio.

Read more: Risk Control Strategies - Research Report