Consultant's Study on the CBOE DJIA Volatility Index (VXD)
In 2007 the Fund Evaluation Group (FEG) issued a new study entitled "Evaluation of BuyWrite and Volatility Indexes - Using the CBOE DJIA BuyWrite Index (BXD) and the CBOE DJIA Volatility Index (VXD) for Asset Allocation and Diversification Purposes." The paper studied the 109-month period from October 1997 to November 2006. The FEG study presented several findings on the 9-year performance of the VXD Index, including:
Volatility Index Can Reduce Portfolio Volatility. Including a small (10%) allocation to the CBOE DJIA Volatility Index (VXD) could have reduced the volatility of an all-stock portfolio by about 26%, without materially affecting returns.
Low Correlation and Diversification. The VXD and the DJIA were inversely correlated (-0.62) over the course of this study. The study showed that VXD increased more during market declines (VXD reacted more to stock market declines than to stock market advances), indicating that VXD has potential as a diversification tool.
Impact on Risk-Adjusted Returns. The inclusion of a small (5%) allocation to the VXD Index boosted risk-adjusted returns for a stock-oriented portfolio, and lowered the risk-adjusted returns for a fixed-income-oriented portfolio.
Click here for a link to the study.