Hi Uncorrelated,Uncorrelated wrote: ↑Sun Aug 30, 2020 1:18 pmThe problem is that TV is not mean-variance optimal. That means there are other strategies that have the same risk as TV, but a higher expected return.hilink73 wrote: ↑Sun Aug 30, 2020 1:10 pmMaybe I'm misunderstanding something (and I admit I'm not understanding half of what you are talking about re utility function, etc.) but I though TV is exactly what's writing on the box: how much volatility you want to accept (read: you're able to stomach)? I never saw it from the max return perspective...Uncorrelated wrote: ↑Sat Aug 29, 2020 4:55 am

If you want to have as little arbitrary assumptions as possible, throwing away target volatility and HFEA is probably the first thing you should do. There are certain assumptions that lead to target volatility, those assumptions are false (see above). There are certain assumptions that lead to a strategy similar to HFEA, but it is very unlikely those assumptions are right for you.

I'm in for a TV of 25% but after this recent downturn I guess I'm able to stomach much more volatility (I've also got experience with dabbling in crypto trading, so volatility doesn't bother me so much (in the long run)).

I won't change my strategy or target volatility yet, though... PV says 80% UPRO/20% TMF for the next month.

There are two conditions that need to be met before TV becomes optimal: recent volatility is the best possible estimate of future volatility, return is proportional to volatility. Both assumptions are clearly false. If you want to take less risk, TV or other market timing approaches are not the answer, the answer is to use a lower equity allocation.

To be more explicit about your discussion of target variance vs. target volatility, we are essentially talking about the difference between scaling your allocation by 1/σ^2 vs. 1/σ right? Assuming your return assumptions are fixed, mean variance gives that scaling by 1/σ^2 is theoretically correct as you noted. Scaling by 1/σ can be thought of as scaling by 1/σ^2 and then multiplying by sigma, hence your statement that target volatility assumes that returns are proportional to volatility, which you say is empirically shown to be false.

Ok. But many people doing this adventure are using constant percent allocations. The way I see it, target volatility allocation is the geometric mean of constant percent allocation and the 1/σ^2 derived from Merton's portfolio. In other words, it can't be that bad since it's moving in the right direction. Your criticism is essentially that it doesn't adjust the allocation enough to volatility movements.