The risk premium is practically zero

The risk premium is practically zero

15-10-2010 | インサイト

The risk premium does not exist and the scope of its failure is wide, says, Eric Falkenstein, Ph.D. and low volatility investing expert.

  • Eric Falkenstein
    Quantitative Equity Strategist at Pine River Capital Management

“I want to convince you that there is no risk premium,” said Eric Falkenstein, Ph.D., quantitative modeling expert and former hedge fund manager. “There are no intuitive metrics of risk that are robustly correlated with returns.” Proving this point was the basis for his recently published book, Finding Alpha: the Search for Alpha when Risk and Return Break Down, and the subject of his talk at the Robeco Minimum Volatility Investing seminar.

No relation between risk and return

His argument that there is no relationship between high-risk stocks and higher return is based on a mountain of empirical research, his own as well as by other practitioners and academics. It all began with a study by the well-known financial economists, Eugene Fama and Kenneth French.

As Falkenstein described in his talk at Robeco, Fama and French published research as early as 1992 that rebutted the capital asset pricing model and showed a flat relationship between volatility and return.  In an interview with the New York Times when the research was published, Fama said, "Beta as the sole variable explaining returns on stocks is dead."

This was a complete about-face for one of the original proponents of the capital asset pricing model, which fundamentally states that higher risk stocks can be expected to produce better returns than lower risk stocks.

Falkenstein, however, goes one step further from Fama's finding of a flat relationship between risk and return, and instead asserts "the real relationship is actually negative." This is visible when the performance of US equity high-beta and low-beta portfolios are compared against the S&P 500 Index. (The data for such a comparison is available on Falkenstein's web site.) Over a period of more than 50 years, low-beta stocks clearly outperformed both the market and high-beta stocks, with high-beta stocks turning in the worst performance of the three portfolios.

Risk premium absent across many investment types

Falkenstein's extensive research reveals the lack of a connection between high-risk securities and high returns across a variety of investment categories, including equities, currencies, commodities, corporate bonds, private equity and even film investing and horse racing. While it is human nature to bet on long-shots at the race track, the higher risk bet is seldom rewarded, and the actual relationship between risk and return in horse racing is overwhelmingly negative.

"The best evidence against the risk premium is not one test," he says, "it is the scope of the failure. There are 20 asset classes where the risk premium fails to occur."

Falkenstein does note a positive association between risk and return in a few investment niches, including the short end of the yield curve and the spread between BBB-AAA corporate bonds. Efficient equity investing, such as indexing, should also yield a positive risk premium, he says, "But the average equity investor does not get the equity risk premium because of problems with taxes and expenses."

Equity risk is not rewarded

He points out that his back-tests of minimum variance portfolios, derived from a range of indexes, including the FTSE, MSCI Europe, Nikkei and S&P 500, have all outperformed the relevant index. "In every case, volatility is 30% lower and returns are 2-3% higher."

For Falkenstein, the take-away from this research is clear cut. "If risk and return are empirically uncorrelated, low-volatility investing is a rather straightforward normative implication of what a rational investor should do." In short, for equity investors, risk is not rewarded. Hence the rising popularity and success of low-volatility strategies.

1 Eugene Fama and Kenneth French, “The Cross-Section of Expected Stock Returns,” Journal of Finance,  47 (June 1992).



当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。




商号等: ロベコ・ジャパン株式会社  金融商品取引業者 関東財務局長(金商)第2780号

加入協会: 一般社団法人 日本投資顧問業協会