What is the optimal level of targeted volatility for a risk balanced fund?

BWG

AQR has one current risk balanced fund (AQRIX) and two more on the way (Medium Volatility - MV and High Volatility - HV). They have different levels of annualized targeted volatility:
AQRIX: 10%
MV: 10%
HV: 15%

I am curious if there are any insights about what is the optimal level of targeted volatility for someone who plans to hold the fund for a long time and is interested in capital appreciation rather than current income? To what extent does the risk associated with the higher volatility strategy lead to higher returns? If so, does the expected return rise proportionately as targeted volatility increase?

Thanks in advance!

BWG

fundalarm

I believe, you need first to establish a benchmark according to your personal risk profile. Then you calculate the standard diviation ("SD") of the benchmark (let's say 60% equities with the volatility of MSCI world index or S&P -- whatever fits you; and 40 bonds -- as measured by the SD of AGG for example). Then you pick up balanced funds to have volatility less or equal to your benchmark.

If you go to individual equity funds, let's say US large cap, then you would try to achieve SD less than S&P500. For US small caps S&P400 (value) or Ru2000 (growth), etc.

Since you're looking for a long holding period, then you woud probably need to look at a 3,5 and 10 year SD (provided the funds have been in existence for so long). Both Lipper and Morgningstar provide SD information. Example for MSIQX (with EAFE benchmark) is linked.
http://performance.morningstar.com/fund/ratings-risk.action?t=MSIQX&region=USA&culture=en-US

BWG

Reply to @fundalarm:

Thanks. Much appreciated.