Portfolios - EDHEC-Risk

Extreme Tracking Error Across Market Conditions
• In 7 out of 10 cases, the diversified strategy does not lower
VaTER compared to the individual strategy with the lowest
VaTER; this is hardly surprising: diversification is not meant to
address extreme risk, and we should turn to hedging.
Diversified (50% Minimum
Minimum Volatility Maximum Sharpe Ratio Volatility + 50% Maximum
Sharpe Ratio)
Conditioning Variable Regime 95% Value at Tracking Error Risk
Annualised Equity Market Excess
Returns (Market –risk free rate)
Low 5.13% 4.99% 5.13%
2 2.92% 3.11% 2.89%
3 3.18% 3.03% 2.99%
4 3.65% 3.50% 3.52%
High 4.95% 4.66% 4.71%
Conditioning Variable Regime 95% Value at Tracking Error Risk
Annualised Market Volatility (of Excess
Market Return)
Low 2.39% 2.83% 2.54%
2 3.02% 2.86% 2.86%
3 3.33% 3.59% 3.50%
4 4.06% 4.05% 3.90%
High 7.10% 6.77% 7.11%
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