By Michael Sloyer
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.
Advisor: Emma Rasiel