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.

Quick Answers to Curious Questions

What is the low-volatility anomaly?

It is the observation that low-volatility stocks often outperform high-volatility ones on a risk-adjusted basis, defying traditional finance theory.

Why does the low-volatility anomaly contradict conventional wisdom?

It challenges the idea that higher risk leads to higher returns, showing that low-volatility stocks can provide better returns with lower risk.

Which sectors are typically associated with low-volatility stocks?

Sectors like utilities, healthcare, and consumer staples are commonly associated with low-volatility stocks.