Sept 18 (Reuters) – Sometimes in life you really can get
more for less, but usually only when someone else is a) acting
foolishly, or b) taking advantage of a client.
So it appears to be with the low-volatility anomaly, a
persistent and puzzling phenomenon under which lower-volatility
stocks, which in theory should offer lower returns, actually
outpace their higher-vol peers. This of course flies in the face
of mainline theories of modern finance, which assume that assets
are priced, in aggregate, based on how risky they are and which
assumes volatility as the prime measure of risk.
Except, when you look at the data, that is not actually how
it works. Among the 1,000 largest U.S. stocks by capitalization
between 1967 and 2012, the bottom fifth in volatility returned
an annualized 11.65 percent, as against just 9.81 percent for a
cap-weighted index, according to data from asset allocation
specialists Research Affiliates. Among global stocks from
1987-2012 the corresponding figures were 10.58 percent for
low-volatility shares against 7.58 percent for the index.
So why can you do better by taking on less volatility?
Remember, though volatility isn’t a perfect substitute for risk
it is undeniably expensive and dangerous. Your risk of being
found short of available assets in a pinch is just one reason
As usual, the answer is that people do stupid stuff, either
on their own behalf or at the expense of others. Actually the
list of reasons, many behavioral, reads like a laundry list of
the shortcomings of the financial markets, its participants and
how they interact with clients.