Abstract
The cumulative return to a levered strategy is determined by five elements that fit together in a simple and useful formula. A previously undocumented element is the covariance between leverage and excess return to the fully invested source portfolio underlying the strategy. In an empirical study of volatility-targeting strategies over the 84-year period 1929–2013, this covariance accounted for a reduction in return that substantially diminished the Sharpe ratio in all cases.
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