VVV Weight Calculations: Prepared for the Downside and Primed for the Upside

  • Two of the most essential ingredients in determining weights are volatilities and variances (also covariances) of assets.
  • In the “Velocity of Volatility and Variance” (or VVV) crash protection mechanism, we adjust the volatilities and the variances (including covariances) of assets depending on how fast they are likely to change during market crashes.
  • Using VVV, our portfolio can outperform, in terms of returns, typical portfolios using more conventional weighing mechanisms by almost 80% with a considerably higher sharpe ratio (e.g. OURS: 1.91 vs OTHERS: 1.44). We achieve this by taking slightly higher risk and based on our belief that volatility is a small price to pay for the convenience of trading anything from anywhere and anytime, as long as we are sufficiently equipped to deal with downward movements.
Correlation Matrix [fig:Correlation-Matrix]
  • Volatility (annualized) of the assets calculated on a 90 day moving internal;
  • vvvFactor calculated on a 90-day moving interval (i.e. volatility of volatility);
  • VVV-Adj-Volatility, which is the sum of annualized Volatility and vvvFactor;
  • vvvWeight calculated using VVV-Adj-Volatility;
  • mvoWeight calculated using mean variance optimization (MVO) by Markowitz;
  • noShortWeight calculated using MVO with no shorts (or no negative weight).
VVV Weights Comparison to MVO Weights [fig:VVV-Weights-Comparison]

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