Low-Volatility Anomaly

The low-volatility anomaly is a market phenomenon where lower-volatility stocks or assets tend to outperform higher-volatility ones on a risk-adjusted basis over the long term. According to traditional finance theory, higher risk should correlate with higher returns, but the low-volatility anomaly shows that portfolios consisting of low-volatility stocks often deliver better returns with lower risk. This anomaly challenges the conventional risk-return relationship in modern portfolio theory.

Example

A portfolio of low-volatility stocks in sectors like utilities and consumer staples outperforms a portfolio of high-volatility technology stocks on a risk-adjusted basis over several years.