Knowledge Tree
risk drag
Facts (10)
Sources
Next Generation Investment Risk Management: Putting the 'Modern ... financialplanningassociation.org 10 facts
claimRebalancing a portfolio acts as an antidote to risk drag.
claimModern Portfolio Theory (MPT) models overstate actual returns over long investment horizons because they adopt expected mean returns without accounting for the effect of risk drag.
measurementThe information technology sector experienced a 15.5 percent simple average return and a 5.5 percent risk drag, resulting in a 10.0 percent compound return.
claimMost portfolio optimizers assume a single uninterrupted investment period, which fails to account for risk drag and prevents the reflection of rules-based rebalancing.
claimRisk drag is the phenomenon where the volatility of an asset's return over time erodes the compound return to the investor.
claimUsing compound annual return as an input in Modern Portfolio Theory (MPT) models is problematic because expected compound returns vary by investment horizon and the degree of risk drag depends on future volatility.
claimThe increased return generated by rebalancing a diversified portfolio of negatively correlated assets results from a decrease in the assets' risk drag.
claimThe risk drag effect is not uniform across all asset classes, which creates difficulties when determining optimal asset allocations.
claimDiversifying between two assets with perfect negative correlation allows an investor to eliminate volatility, and regular rebalancing can increase the portfolio's return over time by reducing risk drag.
claimRisk drag is the difference between the simple average return and the compound return of an investment.