RT Journal Article SR Electronic T1 A Study of Low-Volatility Portfolio
Construction Methods JF The Journal of Portfolio Management FD Institutional Investor Journals SP 89 OP 105 DO 10.3905/jpm.2014.40.4.089 VO 40 IS 4 A1 Tzee-man Chow A1 Jason C. Hsu A1 Li-lan Kuo A1 Feifei Li YR 2014 UL https://pm-research.com/content/40/4/89.abstract AB In this study, the authors examine the hypothetical performance of various low volatility strategies in historical U.S., global developed, and emerging markets. The strategies we replicated outperformed cap-weighted market indices due to exposure to the value, BAB (betting against beta), and duration factors. (The duration factor introduced by the authors here is new to the literature.) A reduction in market beta drives the drop in volatility. The authors report that low volatility strategies can contribute to a more risk-diversified equity portfolio which earns long-term returns from multiple premium sources. The lower risk and higher return seem persistent across geographies and over time. Nonetheless, the authors identify flaws with naïve approaches to portfolio construction, which tend to result in high turnover, low liquidity, and concentrated country and industry allocations. Additionally, price increases would eliminate low volatility stocks’ performance advantage. The conclusion of the authors is that the portfolio construction methods should be sensitive to the investability and valuation levels.TOPICS: Portfolio construction, volatility measures, in portfolio management