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Extracting Value from Volatility

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It is accepted that in order to generate returns in excess of the risk-free rate, an investment strategy must assume some risk. Generally, the greater the risk, the greater the opportunity for returns. Investors trying to outperform the risk-free rate, or more commonly a benchmark index (such as the S&P 500®), have a range of “risk factors” which they can feature in an investment portfolio. 

Some common risk factors in the equity space include Value, Growth, Quality, and Momentum. As an example, an investor that is trying to capture the Value risk premium can overweight those stocks that exhibit stronger Value characteristics, and underweight those stocks that exhibit weaker Value characteristics. 

Another risk factor that is becoming increasingly popular is Volatility. We refer to this as the Volatility Risk Premium. In recent years, it has become common for investors to tilt portfolios towards lower volatility stocks in search of outperformance. But volatility is more powerful than a screening tool for stocks, and can be accessed more precisely by investors to add uncorrelated, incremental returns to an investment portfolio.

Strategies that access the Volatility Risk Premium have become a compelling tool for investors.

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Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.