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Revisiting Anomalies’ Persistence

An article I wrote in September discussed the findings of the study, “Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly,” in which the authors proposed a new explanation for why anomalies (such as the low-beta/low-volatility anomaly) persist.

They hypothesized that the typical institutional investor’s mandate to maximize the ratio of excess returns relative to a fixed benchmark without resorting to leverage can affect the relationship between risk and expected return.

Many institutional investors who are in a position to offset an irrational demand for risky assets also have fixed benchmark mandates that are typically capitalization-weighted. Thus, straying from the benchmarks to exploit anomalies creates career risk.

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