Haugen and his co-author, A. James Heins documented the lack of a positive relationship between risk and return in the empirical cross-section of stock market returns for the first time in 1972. Over the past four decades, he has continued to contribute consistent evidence of a negative relationship between risk and return, including studies across different time periods, regions and asset classes.
His latest research, written with Nardin Baker, looks at stock prices around the world over more than 20 years. Their conclusion? “We looked at the payoff to risk over 21 years in 17 countries and found it was negative in all individual countries,” said Professor Haugen. “High risk stocks only outperform low-risk stocks for very brief periods of time on a rolling three-year basis.” One such brief period was during the IT bubble, he said, before quickly noting “but high-volatility hardly ever outperforms.”
The data is stunning. “Across all countries, the difference in return between the highest-risk and lowest-risk decile portfolios is 19.4%. If you ranked these stocks based on the return slope, you would see how the higher the risk, the lower the returns. And the difference in return volatility (17.9%) shows that stocks with high volatility in the past will continue to have high volatility in the future.”
Haugen believes the evidence is overwhelming in support of low-volatility investing. “This is all you need,” he said, “case closed.”