Unleveraged Portfolios and Pure Allocation Return

Barbara Alemanni, Mario Maggi and Pierpaolo Uberti
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Barbara Alemanni: DIEC Department of Economics, University of Genoa, Via Vivaldi 5, 16126 Genoa, Italy
Mario Maggi: Department of Economics and Management, University of Pavia, Via S. Felice 5, 27100 Pavia, Italy
Pierpaolo Uberti: DIEC Department of Economics, University of Genoa, Via Vivaldi 5, 16126 Genoa, Italy

JRFM, 2021, vol. 14, issue 11, 1-11

Abstract: In asset management, the portfolio leverage affects performance, and can be subject to constraints and operational limitations. Due to the possible leverage aversion of the investors, the comparison between portfolio performances can be incomplete or misleading. We propose a procedure to unleverage the mean-variance efficient portfolios to satisfy a leverage requirement. We obtain a class of unleveraged portfolios that are homogeneous in terms of leverage, so therefore properly comparable. The proposed unleverage procedure permits isolating the pure allocation return, i.e., the return component, due to the qualitative choice of portfolio allocation, from the return component due to the portfolio leverage. Theoretical analysis and empirical evidence on actual data show that efficient mean-variance portfolios, once unleveraged, uncover mean-variance dominance relations hidden by the leverage contribution to portfolio return. Our approach may be useful to practitioners proposing to take long positions on “short assets” (e.g. inverse ETF), thereby considering short positions as active investment choices, in contrast with the usual interpretation where are used to overweight long positions.

Keywords: portfolio leverage; asset allocation; exchange traded funds (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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