Article by: Michael Sloyer and Ryan Tolkin
Published by: Duke University
Date: 2008
“The VIX, a measure of the implied volatility of S&P 500 index options, is the
premier gauge of investor sentiment and market volatility. This analysis examines the
effectiveness of adding the VIX to passively managed equity-bond portfolios.
Furthermore, this study extends the existing literature by examining the efficacy of the
VIX in a life-cycle investing context. Due to the large negative correlation between the
VIX and the major equity indices, we find that a relatively small allocation to the VIX
would have significantly improved the risk-return profile of standard equity-bond
portfolios from 1986 through 2007. Additionally, we find that younger investors (i.e.
investors with higher risk tolerances and thus more exposure to equities rather than fixed
income) will benefit from having greater exposure to the VIX.”
Full article (PDF): Link