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When Risk Doesn’t Lead To Return

Among the more notable anomalies in modern finance is the finding that the lowest-beta stocks have produced higher returns than the highest-beta stocks. Another anomaly is that idiosyncratic (diversifiable) volatility negatively predicts equity returns. In other words, stocks with the lowest idiosyncratic volatility outperform stocks with the highest idiosyncratic volatility.

These findings have spurred a large body of literature on what are referred to as “low-risk anomalies.” Such results are considered puzzling because higher risk should be rewarded with higher returns, but here we see just the opposite.

Read the rest of the article on ETF.com.

 

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