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Low volatility anomaly

The low volatility anomaly refers to the finding that stocks exhibiting lower volatility achieve higher returns than can be explained by the efficient market theory (Capital Asset Pricing Model).

Empirical research shows low-volatility securities, because they usually fall less in down markets, tend to generate higher risk-adjusted returns over the longer term.

This counter intuitive phenomenon was first documented more than forty years ago. According to the CAPM, investors’ decisions are rational.

They reason that higher risk, in this case higher volatility, will always entail higher returns.

But in 1972, a study by outperformed in the period 1929-1971. Further research confirmed this ‘low beta effect’ for other equity markets and Robeco researchers documented a similar ‘low volatility effect‘: lower volatility stocks generate higher risk-adjusted returns.

Further academic research demonstrated that the volatility effect is growing stronger in the European, Japanese and Emerging equity markets.

See also: Low volatility factor

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