Practical analysis for investment professionals
05 November 2014

Exploring the Determinants of Levered Portfolio Performance (Podcast)

Over the past two years, two teams of Financial Analysts Journal authors have been exchanging ideas through a series of articles and letters published in the FAJ. In 2012, Clifford S. Asness, Andrea Frazzini, and Lasse H. Pedersen published an article entitled “Leverage Aversion and Risk Parity” in the FAJ. Picking up the theme of leverage and risk parity, Lisa R. Goldberg and her coauthors, Robert M. Anderson and Stephen W. Bianchi, CFA, published “Will My Risk Parity Outperform?” in the November/December 2012 issue of the FAJ. Asness, Frazzini, and Pedersen wrote a letter in response to that article, which triggered a reply from Goldberg and her coauthors.

In the latest installment of this dialogue, Anderson, Bianchi, and Goldberg published “Determinants of Levered Portfolio Performance” in the September/October 2014 issue of the FAJ. We got the chance to talk with Goldberg about her new research and this ongoing discussion.



Goldberg said that the most recent article, which can stand alone, represents the latest entry in the exchange of ideas on risk parity and leverage. Referencing the letter by Asness, Frazzini, and Pedersen, she said that “they had a comment we couldn’t respond to at the time that we wrote our letter, responding to most of their points. It came down to something kind of interesting: a volatility-targeting strategy.”

Anderson, Bianchi, and Goldberg found that the cumulative return to a levered strategy is determined by five elements that connect to form a useful, simple formula. “We began our research by trying to run, side by side, two very similar-sounding strategies that are indeed very different in practice,” Goldberg said. “And what we discovered in trying to answer this question — were Asness, Frazzini, and Pedersen wrong? — [was] that it wasn’t the volatility targeting at all that seemed to be driving the results, but the leverage.”

Importantly, the article uncovers a previously undocumented element, which is the covariance between leverage and excess return to the fully invested source portfolio underlying the strategy.

“Our hope is that those practitioners who are running leveraged strategies and those investors who are getting the benefits — or living with the heartache of those leveraged strategies — will take account of the covariance term,” she said.

To hear Goldberg continue the dialogue and further discuss her and her coauthors’ research, listen to the interview above or download the MP3.

CFA Institute members can read the full article on the Publications website.


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Abby Farson Pratt

Abby Farson Pratt was an assistant editor at CFA Institute. Previously, she worked at the Denver Post and the University of North Carolina Press. Pratt earned the Claritas™ Investment Certificate and holds a BA in journalism and English from the University of North Carolina at Chapel Hill.

1 thought on “Exploring the Determinants of Levered Portfolio Performance (Podcast)”

  1. Brad Case, Ph.D., CFA, CAIA says:

    This is really excellent research, the kind of research that advances the field in an important way. I strongly recommend the FAJ article.
    I hope to see this research advance along one important question in particular: what is the effect of leverage when applied to an asset class whose volatility is not measured properly?
    The returns of illiquid assets–particularly private equity and private real estate–cannot be measured through transactions in a well-functioning market. Instead their returns are computed using estimated asset values, but this valuation method dramatically underestimates volatility. If you have a volatility-targeting strategy in which you are systematically underestimating the volatility, what does that do to the drag on returns caused by the use of leverage?
    If anybody has thoughts on that question, I would really appreciate hearing them. And if anybody wants to collaborate on answering the question, I’m interested.

Leave a Reply

Your email address will not be published.



By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close