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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/29537
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| Title: | A Behavioral Finance Explanation for the Success of Low Volatility Portfolios |
| Authors: | Wurgler, Jeffrey
Bradley, Brendan
Baker, Malcolm |
| Issue Date: | 19-Jan-2010 |
| Series/Report no.: | FIN-09-029 |
| Abstract: | Arguably the most remarkable anomaly in finance is the violation of the
risk‐return tradeoff within the stock market: Over the past 40 years,
high volatility and high beta stocks in U.S. markets have substantially
underperformed low volatility and low beta stocks. We propose an
explanation that combines the average investor's preference for risk and
the typical institutional investor's mandate to maximize the ratio of
excess returns to tracking error relative to a fixed benchmark (the
information ratio) rather than the Sharpe ratio. Models of delegated
asset management show that such mandates discourage arbitrage activity
in both high alpha, low beta stocks and low alpha, high beta stocks.
This explanation is consistent with several aspects of the low
volatility anomaly including why it has only strengthened even as
institutional investors have become more numerous. |
| URI: | http://hdl.handle.net/2451/29537 |
| Appears in Collections: | Finance Working Papers
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