Reducing Portfolio Risk Using Volatility - A risk-return examination of the addition of VIX and VIX futures contracts to an equity portfolio

Abstract

This thesis examines the effects of adding volatility, as represented by the CBOE Volatility Index (VIX) and VIX futures contracts, to a stock portfolio in terms of portfolio risk and portfolio return. The study is based on statistical properties as well as Markowitz’s modern portfolio theory, with support from previous research conducted by Hill (2013), Szado (2009), and Daigler and Rossi (2006). We find that volatility can be used to reduce risk in a stock portfolio, and in many cases also increase expected portfolio return. These findings are in line with previous mentioned research.