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Further evidence in support of a low-volatility anomaly: Optimizing buy-and-hold portfolios by minimizing historical aggregate volatility

Author

Listed:
  • Phil Maguire

    (National University of Ireland)

  • Stephen Kelly

    (National University of Ireland)

  • Robert Miller

    (National University of Ireland)

  • Philippe Moser

    (National University of Ireland)

  • Philip Hyland

    (National College of Ireland, IFSC)

  • Rebecca Maguire

    (National College of Ireland, IFSC)

Abstract

The ‘low-volatility anomaly’ is the counter-intuitive observation that portfolios of low-volatility stocks tend to yield higher risk-adjusted returns than portfolios of high-volatility stocks. In this article, we investigate if the anomaly holds, not only for portfolios consisting of individual low-volatility stocks, but for portfolios that have been optimized to minimize aggregate volatility. We exploit patterns in historical price fluctuations to identify optimized portfolios whose aggregate volatility is expected to remain low. These portfolios are evaluated by comparing them against the performance of market capitalization and low-volatility quintile benchmarks out-of-sample. The results reveal that, as well as outperforming the market, both in terms of returns and risk, optimized low-volatility strategies also outperform the S&P Low-Volatility Index. These findings provide further support for a low-volatility effect, and imply that the root of the anomaly may lie with a failure to exploit diversification opportunities.

Suggested Citation

  • Phil Maguire & Stephen Kelly & Robert Miller & Philippe Moser & Philip Hyland & Rebecca Maguire, 2017. "Further evidence in support of a low-volatility anomaly: Optimizing buy-and-hold portfolios by minimizing historical aggregate volatility," Journal of Asset Management, Palgrave Macmillan, vol. 18(4), pages 326-339, July.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:4:d:10.1057_s41260-016-0036-1
    DOI: 10.1057/s41260-016-0036-1
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    References listed on IDEAS

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    Cited by:

    1. Phil Maguire & Karl Moffett & Rebecca Maguire, 2018. "Combining Independent Smart Beta Strategies for Portfolio Optimization," Papers 1808.02505, arXiv.org, revised Aug 2018.

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