CURE

The healthcare sector, the second-largest sector allocation in the S&P 500, is hardly impressing this year. Year-to-date, the S&P Health Care Select Sector Index is lagging the S&P 500 by about 140 basis points.

Senior housing operators have experienced significant losses this year due to COVID-19 as well as the corresponding recession. Operating expenses have also risen, as precautions must be taken to protect this real estate sector's vulnerable residents. However, there is a light at the end of this tunnel of undetermined length, and that light is the rising population of individuals over 75 years old. Cap rates may also rise as development subsides, which will benefit existing senior housing. REITs that use the senior housing operating portfolio structure have been hit the hardest, while those that use triple net leases have done the best.

In this article I will walk you through the commonly used but wrong way to think about volatility decay.We'll then walk through an example of volatility decay with realistic numbers.Afterwards, we'll build a simple mathematical model to calculate volatility decay from first principles.We'll compare the model with back-test simulations done on portfoliovisualizer.com.