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what is the low volatility factor for quantitative equity portfolio investing
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July 2024 · 5 min read

Low-Volatility Factor


What is the low-volatility factor ?

The low volatility factor is a well known effect that goes against many common assumptions that investors would have. A natural prior assumption would be that stocks with higher volatility compared to stocks with lower volatility should all else being equal, generate higher returns. This is based on the common assumption that higher risk should generate higher returns, as compensation for bearing that risk.

  • higher volatility --> higher returns

Counterintuitively, it is the stable lower volatility stocks that produced better risk-adjusted returns. Many investors and academics have termed this the low-volatility anomaly.

This had led to the construction and classification of the low-volatility factor. This factor has been shown to be:

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