Targets, Predictability, and Performance

Francisco Peñaranda () and Liuren Wu ()
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Francisco Peñaranda: Queens College, CUNY, Flushing, New York 11367
Liuren Wu: Baruch College, CUNY, New York, New York 10010

Management Science, 2022, vol. 68, issue 2, 1537-1555

Abstract: We study market-timing strategies on a given portfolio to achieve a particular risk or return target. Targeting a constant risk level leads to increasing investment at better investment opportunities, whereas targeting a constant expected return does the opposite. Theoretical and numerical analysis shows that within the usual ranges of investment opportunities, risk targeting generates better unconditional performance than return targeting across a wide range of metrics. Empirical analysis with commonly constructed stock portfolios further highlights the practical infeasibility of return targeting due to the inherently low out-of-sample predicting power. By contrast, risk targeting tends to enhance unconditional stability and performance.

Keywords: market timing; return targeting; risk targeting; Sharpe ratio; information ratio (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:2:p:1537-1555

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