Ibbotson Announces Study on ``Buy-Write'' Investment Strategy; Covered-Call Investing Can Enhance Risk/Return Tradeoff of a Portfolio.CHICAGO -- Ibbotson Associates, a leading provider of asset allocation Asset Allocation The process of dividing a portfolio among major asset categories such as bonds, stocks or cash. The purpose of asset allocation is to reduce risk by diversifying the portfolio. knowledge and tools, today announced the results of its case study on the "covered-call" investment strategy represented by the CBOE CBOE See: Chicago Board Options Exchange CBOE See Chicago Board Options Exchange (CBOE). S&P 500 BuyWrite Index (BXM BXM Broadband Switch Module (Cisco) ). The study was three-fold: 1) assess risk-adjusted performance of the BXM; 2) evaluate the role of this covered-call strategy in a portfolio; and 3) establish if an investor can implement the strategy. Ibbotson researchers found that the BXM has had the best risk-adjusted performance of the major domestic and international equity-based indexes over the last 16 years, and that the index enhances the risk-return tradeoff Risk-Return Tradeoff The principle that potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. when added to a portfolio. Ibbotson researchers also found that the returns of the Rampart BXM (an investment vehicle that seeks to replicate the index) did closely match those of the CBOE BXM. This is significant because it demonstrates that an investor can implement this covered-call strategy. "A covered-call strategy is when an investor buys a stock, or basket of stocks, and writes (or sells) call options that cover the stock position. A key benefit of this strategy is that downside moves are cushioned by the option premium received from the sale of the options," explained Dr. Peng Chen, chief investment officer at Ibbotson Associates. "This can be a valuable strategy for reducing overall portfolio risk." The compound annual return of the BXM over its 16-year history was 12.4%--slightly higher than the 12.2% achieved by the S&P 500 and with a third less risk. And the risk-adjusted return Risk-Adjusted Return A measure of how much risk a fund or portfolio takes on to earn its returns, usually expressed as a number or a rating. Notes: This is often represented by the Sharpe Ratio. The more return per unit of risk, the better. for the BXM buy-write strategy was 38% higher than that of the S&P 500. Based on this historical data, when a 15% allocation of the BXM index was added to a moderate portfolio, volatility was reduced by almost a full percentage point with almost no sacrifice of return. About Ibbotson Associates Ibbotson Associates, founded by Professor Roger Ibbotson in 1977, is a leading authority on asset allocation, providing products and services to help investment professionals obtain, manage and retain assets. The company's business lines include investment consulting and research; planning and analysis software; investment advice; educational and marketing services and a widely used line of NASD-reviewed presentation materials. With offices in Chicago, New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of and Tokyo, Ibbotson Associates markets its integrated product line to institutional money managers, insurance companies, plan sponsors and consultants, financial planners Financial Planner A qualified investment professional who assists individuals and corporations meet their long-term financial objectives by analyzing the client's status and setting a program to achieve these goals. , brokers, mutual fund firms, hedge funds hedge fund, in finance, a highly speculative, largely unregulated investment device. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" , banks and small money managers. |
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