Low-Volatility Portfolio Construction: Ranking Versus Optimization

Abstract

We analyze the low-volatility effect in the U.S. equity market with a focus on the common properties of various low-volatility strategies. Drawing from the extensive academic literature that exists on the topic, we examine the two major approaches to constructing low-volatility portfolios and apply them to the U.S. equity market: mean variance optimization–based and rankings-based approaches. Our analysis shows that both approaches are equally effective in reducing portfolio volatility over a long-term investment horizon. We then extend our analysis to the international and emerging markets. Our findings confirm that the low-volatility effect is not unique to the U.S. equity markets; it is present on a global scale.