LO 64.1: Describe and evaluate the low-risk anomaly of asset returns.

LO 64.1: Describe and evaluate the low-risk anomaly of asset returns.
The capital asset pricing model (CAPM) from traditional finance states that there should be a positive relationship between risk and return. Higher risk, as measured by beta, should have a higher return. The low-risk anomaly appears to suggest the exact opposite. This anomaly finds that firms with lower betas and lower volatility have higher returns over time. For example, over a five-year period from 20112016, the cumulative return for a low volatility fund (iShares Edge MSCI Minimum Volatility USA ETF) was 68.75% relative to the cumulative return of 65.27% for the S&P 500 Index ETF.
Al p h a , Tr a c k in g Er r o r , t h e In f o r m a t io n Ra t io , a n d t h e Sh a r pe Ra t io

Write a Comment