Low Risk Anomaly

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Mayank Joshipura

Introduction
MPT & Low Risk
Anomaly

Is This Possible?

According to the Modern Portfolio Theory,

there exists a direct relationship between
risk and the expected return.
Riskbased Anomaly A portfolio with
low volatility stocks can yield higher returns
than a high-volatility portfolio.
The two strategies frequently used to exploit
this risk anomaly are [a] Low volatility
portfolio & [b] Minimum variance portfolio.
This study intends to employ both Low
volatility (LV) & Minimum variance (MV)
investment strategies to explore risk
anomaly in Indian markets.

Mayank Joshipura

Literature Review
Scholars

Proposition

Findings

Robert
First on to note the
Haugen (1991) abnormality of lower-risk
Portfolios
Roger Clarke,
Harvin de
Silva, and
Steven
Thorley (2006)

MV portfolios reduced
volatility by 25% while
delivering comparable
returns

Blitz and Vliet Portfolios of LV stocks are

(2007,2011)
associated with higher
Sharpe-ratio
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No insight due to limited

empirical support

MV

Market

Excess

+6.5%

+5.6%

Volatility

11.7%

15.7%

portfolio

Index

Returns
Low volatility stocks (be it low
beta or low standard deviation)
have superior risk-adjusted
returns

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Blitz & Vliet (Robeco Asset Management

Quantitative Strategies)

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Regional Results

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Comparison with other investment

strategies

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Blitz and Vliet (2007)

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Clarke et. al. (2006)

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Emergence of new finance!

In the US markets, Low-volatility investing for the

long term has become the latest investment
philosophy after the Value, Size and Momentum
investing philosophies
S&P has just announced the next launch of S&P500
LV index
Investment houses such as the Deutsche Bank in
Europe and Canada, Martingale Asset management,
Morgan Stanley, Analytic Investors LLC for US and
Global markets, etc. have already launched funds
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Mayank Joshipura

All stocks Volatility Quintiles

Baker, Brendan & Wurgler (Jan 1968 to Dec 2008)
FAJ(2011)

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Large stocks universe

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All Stocks universe: Beta Quintiles

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Large Stocks Universe: Beta

Quintiles

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BBW (2011)

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Haugen (2012)

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Haugen (2012)

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Emerging market
performance

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Option like management

compensation model

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Relative preference for High Beta/Low

Alpha over Low beta/High Alpha
Limits to arbitrage:
Restrictions on borrowing and fund mangers
mandate to outperform a set benchmark
dont allow arbitrage between low beta-high
alpha and high beta-low alpha stocks.
Poor Fund Managers facing SAHDEV FATE!

LBOs can achieve this and thats the secret

why PEs target stable, cash rich and strong
balance sheet (high available borrowing
capacity) firms as target.
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Problems associated with Delegated fund

management with mandate of outperforming
benchmark

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Behavioral Biases
Preference for high volatility stocks
Preference for lottery (low priced, high
volatility stocks are considered positively
skewed lottery like payoff)
Representativeness- all new technology firm
IPO has Microsoft in the making!
Overconfidence-Volatile outcomes but I can
predict with certainty

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