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The Valuation of Low Volatility Where do value and low volatilty intersect?
BY Fei Mei Chan


What is commonly referred to as the low volatility anomaly is not a recent discovery; it has been well documented in academic research for over four decades. Popularized in the turmoil following the 2008 financial crisis, low volatility strategies, as the name suggests, have served well in times of market instability. Here is the anomalous aspect: despite their lower risk, low volatility strategies have outperformed their benchmarks over time, challenging classic capital asset pricing theory that risk and reward go hand in hand. “The long-term outperformance of low-risk portfolios is perhaps the greatest anomaly in finance.”

The S&P 500® Low Volatility Index is an example of such a strategy. From January 1991 to June 2016, this index delivered an average annual return of 11.19%, compared with 9.78% for the S&P 500, with less volatility (standard deviations of 11% and 14%, respectively).

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