Continuing our countdown to Christmas, Eric Hermitte puts the case for adding a long volatility exposure to a portfolio - both as a diversifier and a potential 'shock-absorber'.
Volatility is well known as a measure of an asset's variability. It describes how (un)stable an asset is. When talking about volatility, however, it is essential to differentiate between realised and implied volatility. Realised volatility is an ex-post indicator of an asset's variability whereas implied volatility reflects the market's anticipation of an asset's future fluctuations. It is inferred from the price of options traded in the market. While being traditionally considered as a risk indicator, volatility also combines all the characteristics of an asset class: *Accessibili...
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