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Volatility Effect

In: Investment Strategies

Author

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  • Bill Jiang

    (Legal & General Investment Management)

Abstract

The volatility effect is the tendency of stocks with relatively low volatility to outperform the market over time. It is contrary to the conventional view that higher returns require more risk. This chapter explains the construction of low-volatility portfolios with the low-volatility and minimum-variance methods. It discusses the return premium of the volatility factor and the capital asset pricing model (CAPM). The CAPM specifies that asset return is expected to increase as the risk level rises. The evidence of the volatility anomaly fundamentally challenges the validity of the CAPM framework.

Suggested Citation

  • Bill Jiang, 2022. "Volatility Effect," Springer Books, in: Investment Strategies, chapter 0, pages 173-183, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-82711-3_14
    DOI: 10.1007/978-3-030-82711-3_14
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