Comment by abcd_f
6 hours ago
If A and B have different volatilities, it's rather counter-intuitive to allocate proportionally rather than just all to the one with the lower volatility... :-/
6 hours ago
If A and B have different volatilities, it's rather counter-intuitive to allocate proportionally rather than just all to the one with the lower volatility... :-/
I agree, and I had to think about it for a second, but now it seems obvious. It works for the exact same reason that averaging multiple independent measurements can give a more accurate result. The key fact is that the different random variables are all independent, so it's unlikely that the various deviations from the means will line up in the same direction.
The independence assumption means there's value in allocating to the more volatile one, due to diversification.