Quantitative investing

Anomaly

In the investing world, an anomaly refers to phenomena unaccounted for by standard theories, such as divergences from the Capital Asset Pricing Model (CAPM).

This model assumes a direct relationship between risk and return based on the rationality of investors. However, behavioral finance challenges this view, suggesting that investor behavior can lead to irregularities. A notable anomaly is the low-volatility discrepancy, which challenges the CAPM's predictions about risk and return.

Figure 1. Historical performance characteristics of US equity portfolio, July 1963 - December 2010

Source: Blitz (2012), Strategic Allocation to Premiums in the Equity Market, Journal of Index Investing

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