What is the low-volatility anomaly?
The low-volatility anomaly is the name given to the phenomenon that low-risk (low-volatility) securities seem to have higher returns than high-risk securities.
Where have you heard about the low-volatility anomaly?
Plenty of studies prove the existence of the low-volatility anomaly. One of the most significant was done by Brendan Bradley, Jeffrey Wurgler and Malcolm Baker. The study showed that over a huge 40-year period, low-risk securities outperformed high-risk securities by a significant margin.
What you need to know about the low-volatility anomaly.
The low-volatility anomaly goes directly against modern portfolio theory and the Capital Asset Pricing Model, both of which suggest that high-risk generates higher returns. The anomaly blew much of traditional volatility theory out of the water when it was first proven.
Because high-volatility securities attract more attention (because traders are optimistic about their future performance, and perhaps overconfident about their ability to predict future events), low-volatility stocks are often cheaper. It's worth looking at low-volatility stocks as part of your long-term investment plan – but, as with anything, you should remember that there's always the risk that the value could change at any minute.
Find out more about the low-volatility anomaly.
To learn more about low volatility, read our guide to the term here.