Research Affiliates: "True Grit: The Durable Low Volatility Effect"

In the latest piece from Research Affiliates, Feifei Li, Director and Head of Product Research & Management, and Philip Lawton, Vice President, Marketing, look at reasons why low-risk stocks outperform high-risk stocks in the long run, which is counter to the generally accepted investment tenet that one must accept higher risk to earn higher returns.

True Grit: The Durable Low Volatility Effect

One of the basic tenets of finance is that investors are compensated for taking risk. For equity markets, that means that high volatility stocks are expected to outperform low volatility stocks. But that hasn’t happened. Low-risk stocks have historically outperformed high-risk stocks.

Will this low volatility effect persist? Renewed interest in low volatility strategies has led to higher demand for low...