Volatility targeting in tactical asset allocation

GARCH volatility predictions are of direct practical use in portfolio allocation. According to the two-fund separation theorem of James Tobin, you should invest a proportion \(w\) of your wealth in a risky portfolio and the remainder in a risk free asset, like a US Treasury bill.

When you target a portfolio with 5% annualized volatility, and the annualized volatility of the risky asset is \(\sigma_t\), then you should invest \(0.05/\sigma_t\) in the risky asset.