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.
Key points
• A phenomenon where low-volatility stocks outperform high-volatility stocks on a risk-adjusted basis over the long term.
• Challenges the traditional finance theory that higher risk correlates with higher returns.
• Often seen in low-volatility sectors like utilities, healthcare, and consumer staples.
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