ETF Portfolio and benefits from Volatility Pumping

Abstract

There are several strategies to manage our portfolio, and essentially we can divide them into two macro-categories: Active Management and Passive Management. Several studies have confirmed that in the long run, passive management pays more than active but using passive management par excellence (Buy & Hold), the composition of the portfolio can vary over time, no longer reflecting our needs as an investor and perhaps exposing us at more significant risks than we are willing to take. Volatility Pumping (or Rebalancing Premium) is the passive management that allows us to keep fixed quotas within our portfolio (for example, 60% stock and 40% bond) rebalancing periodically or for specific deviation intervals. With my thesis, I will perform simulations using R to verify the performance of a portfolio consisting of an equity ETF and a bond ETF in the presence of a Buy & Hold strategy and compare them with those obtained by rebalancing, verifying whether there is a benefit from the so-called Volatility Pumping. ​