{"id":1214686,"date":"2020-09-06T06:30:27","date_gmt":"2020-09-06T06:30:27","guid":{"rendered":"https:\/\/stockviz.biz\/index.php\/2020\/09\/06\/the-low-volatility-anomaly\/"},"modified":"2021-09-14T08:37:59","modified_gmt":"2021-09-14T03:07:59","slug":"the-low-volatility-anomaly","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2020\/09\/06\/the-low-volatility-anomaly\/","title":{"rendered":"The Low Volatility Anomaly"},"content":{"rendered":"\n

More returns for less risk<\/h2>\n\n\n\n

Our previous post on Momentum<\/a> highlighted the inherent cliff-risk in the \u201cbuy-high, sell-higher\u201d strategy. But even before Fama French published their 3-Factor paper, researchers had found that the \u201chigh risk = high reward\u201d relationship is quite fragile. In 1972, Haugen, Robert A., and A. James Heins, studying the period from 1926 to 1971, came out with a working paper – On the Evidence Supporting the Existence of Risk Premiums in the Capital Market <\/em>(ssrn<\/a>) – that concluded that over the long run stock portfolios with lesser variance in monthly returns have experienced greater average returns than their \u2018riskier\u2019 counterparts <\/em>(wikipedia<\/a>).<\/p>\n\n\n\n

Basically, a portfolio of low-volatility stocks will out-perform the market. More returns for less risk.<\/p>\n\n\n\n

What Explains the Anomaly?<\/h2>\n\n\n\n

There are two main trains of thought on why this anomaly persists.<\/p>\n\n\n\n

  1. It is difficult to short high-beta stocks and buy low-beta stocks. Because, if it were easy, one could construct a zero-beta portfolio with positive expected returns\u2026 and this anomaly would vanish.<\/p><\/li>

  2. Stocks of companies with predictable earnings exhibit low-volatility. So, low-volatility is essentially high-quality – a known investment factor.<\/p><\/li><\/ol>\n\n\n\n

    Historical Performance<\/h2>\n\n\n\n

    While low-volatility has out-performed market indices, it is magic wand that makes drawdowns disappear.<\/p>\n\n\n\n

    India<\/h3>\n\n\n

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