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jnogales
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March 5th, 2011, 10:40 am

I recommend you this article published recently in Forbes:http://www.forbes.com/forbes/2011/0314/ ... sk.htmlThe authors provide new evidence that favors the investments in low volatility stocks.Their surprising conclusion: $10,000 invested in the riskiest 20% of all stocks, and with the portfolio refreshed monthly, would have shrunk 5.5% annually to less than $1,000 after inflation over the 41 years studied. The same amount invested in the least risky 20% would have grown to an inflation-adjusted $100,000, representing an annualized 5.8% return, or 1.6 percentage points above the S&P 500.What is your opinion about these strategies?Do you think these strategies are alternatives to others, like Value or Momentum?
 
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frenchX
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March 6th, 2011, 5:03 pm

My 2$ comment (a physicist comment so maybe it's a naive one). Those stocks have low volatility because they aren't traded a lot. If big investors switch massively to those ones, the trading activity and thus the volatility will increase. They are profitable probably because they are not well known outliers.
Last edited by frenchX on March 5th, 2011, 11:00 pm, edited 1 time in total.
 
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daveangel
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March 6th, 2011, 6:45 pm

QuoteOriginally posted by: frenchXMy 2$ comment (a physicist comment so maybe it's a naive one). Those stocks have low volatility because they aren't traded a lot. If big investors switch massively to those ones, the trading activity and thus the volatility will increase. They are profitable probably because they are not well known outliers.not true - they might be low vol stocks because they are close to being fixed income type instruments.. think of a tobacco company. you could almost value it like a bond with a larger risk premium to account for unforeseen lawsuits, unexpected legislation etc. but most of the time you can be fairly confident of receiving a dividend which grows at inflation plus any organic growth.
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frenchX
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March 6th, 2011, 6:58 pm

Nice point ! Are any companies delivering what I would say first needed goods (like food, tobacco, etc) this kind (in a very general sense) ? And my second question: Is it possible for an asset to have a very high drift and a very low volatility ?
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acastaldo
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March 6th, 2011, 7:16 pm

Thanks for linking the Forbes article. It seems to be based on a Baker Bradley Wurgler article published in FAJ January/February 2011, Vol. 67, No. 1. It is not available without a subscription, but an earlier draft (Benchmarks as limits to arbitrage) is available on SSRN.
 
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Alan
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March 6th, 2011, 10:36 pm

1.6 percentage points above the S&P 500 for a paper-back-test with no transaction costs, an apparent arbitrary start date,and potentially huge diversification mismatch with the S&P500.Good luck.
 
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tu160
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March 7th, 2011, 4:23 am

Last edited by tu160 on December 9th, 2011, 11:00 pm, edited 1 time in total.
 
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jnogales
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March 8th, 2011, 10:09 am

Some answers to your previous comments:Indeed, low volatility portfolios tend to trade on large companies, and they tend to be diversified (up to 30% of market share). Of course, there are many stocks where risk and return are not positive correlated in practice. Moreover, there exist the MSCI volatility indices to help portfolio managers as relevant benchmarks. There is empirical evidence these indices outperform (on a risk-return basis) broader indices like the MSCI World Index.Thanks for the reference to the SSRN paper.I have found other two interesting references related with this topic:A New Look at Minimum Variance Investing by B. Scherer in the SSRN.The Cross-Section of Volatility and Expected Returns by Ang, Hodrick, Xing and Zhang, in the Journal of Finance.
 
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rmax
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March 8th, 2011, 1:23 pm

DATE: 01/01/2006Low risk high reward. If only I could come up with something like that. I don't know - a product that if you lumped together a load of credit events and sold off the tranches - get them rated - sounds good -surely not everyone is going to default at the sametime?Or just put all your money in a bank where there is very little risk, but high interest. Ice land or something.....
 
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Hansi
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March 8th, 2011, 1:30 pm

QuoteOriginally posted by: rmaxIce land or something.....No space
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Cuchulainn
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March 8th, 2011, 1:37 pm

QuoteOriginally posted by: HansiQuoteOriginally posted by: rmaxIce land or something.....No space I thought in MyVatn (and of course, Hotel Borg).
 
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Hansi
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March 8th, 2011, 1:46 pm

QuoteOriginally posted by: CuchulainnQuoteOriginally posted by: HansiQuoteOriginally posted by: rmaxIce land or something.....No space I thought in MyVatn (and of course, Hotel Borg).Iceland.
 
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Cuchulainn
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March 8th, 2011, 1:51 pm

QuoteOriginally posted by: HansiQuoteOriginally posted by: CuchulainnQuoteOriginally posted by: HansiQuoteOriginally posted by: rmaxIce land or something.....No space I thought in MyVatn (and of course, Hotel Borg).Iceland.Yep. Great.
 
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jnogales
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March 10th, 2011, 8:26 am

But I repeat my first question: Do you think these strategies are alternatives to others, like Value or Momentum?In the paper by Scherer (see previous post), he found evidence the performance of zero-cost low beta portfolios (in terms of Sharpe ratios) is much better than that of well-known factors like the HML (used by value investors).In other words, I think Value or Momentum strategies are alternatives but different to low volatility ones. I mean, Value or Momentum investments focus on increasing returns while maintaining some level of risks. But on the other hand, low-risk investments focus on decreasing the risk while maintaining some level of returns.I guess the performance can even be improved by using low volatility strategies only for value stocks. What do you think?
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