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The Journal of Index Investing

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Low-Volatility Investing

Jason Hsu and Feifei Li
The Journal of Beta Investment Strategies Fall 2013, 4 (2) 67-72; DOI: https://doi.org/10.3905/jii.2013.4.2.067
Jason Hsu
is chief investment officer at Research Affiliates, LLC, in Newport Beach, CA, and an adjunct professor of finance at the UCLA Anderson School of Management.
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  • For correspondence: hsu@rallc.com
Feifei Li
is a director in Research & Investment Management at Research Affiliates, LLC, in Newport Beach, CA, and a visiting professor of finance at The Paul Merage School of Business at UC Irvine.
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Abstract

It is well established that stocks with lower price fluctuations tend to outperform riskier ones. This article reviews plausible explanations for the low volatility anomaly and reproduce the performance of low volatility strategies in different market environments as well as in different geographical applications. We further attribute the outperformance by decomposing the excess returns of low volatility strategies into well-known sources of equity factor premiums. We find that standard long-only low volatility strategies capture not just the low volatility premium, but, in many cases, also rely on other premiums. Additionally, we illustrate the benefit of incorporating low volatility equity strategies in an asset allocation exercise; the inclusion of low volatility strategies can significantly expand the efficient frontier and improve the resulting portfolio’s overall risk/return profile.

TOPICS: Volatility measures, portfolio construction, passive strategies

  • © 2013 Pageant Media Ltd
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The Journal of Index Investing: 4 (2)
The Journal of Beta Investment Strategies
Vol. 4, Issue 2
Fall 2013
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Low-Volatility Investing
Jason Hsu, Feifei Li
The Journal of Beta Investment Strategies Aug 2013, 4 (2) 67-72; DOI: 10.3905/jii.2013.4.2.067

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Low-Volatility Investing
Jason Hsu, Feifei Li
The Journal of Beta Investment Strategies Aug 2013, 4 (2) 67-72; DOI: 10.3905/jii.2013.4.2.067
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  • Article
    • Abstract
    • HOW DOES LOW-VOLATILITY INVESTING PERFORM?
    • WHERE DOES LOW-VOLATILITY INVESTING’S PERFORMANCE COME FROM?
    • WHAT CAN LOW-VOLATILITY STOCKS DO FOR INVESTMENT PROGRAMS?
    • CONCLUSION
    • APPENDIX
    • ENDNOTE
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