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Abstract

The authors explored whether the well-publicized anomalous returns associated with low-volatility stocks can be attributed to market mispricing or to compensation for higher systematic factor risk. The results of their study, covering a 46-year period, indicate that the relatively high returns of low-volatility portfolios cannot be viewed solely as compensation for systematic factor risk. The results from their cross-sectional analyses indicate that average returns to low-volatility portfolios are determined by common variations associated with the idiosyncratic-volatility characteristic rather than factor loadings. This finding suggests that the excess returns are more likely driven by market mispricing connected with volatility as a stock characteristic.

About the Author(s)

Xi Li

Xi Li is an associate professor of finance at the University of Arkansas, Fayetteville.

Rodney Sullivan
Rodney N. Sullivan CFA

As executive director of the Richard A. Mayo Center for Asset Management, Rodney Sullivan has primary leadership and managerial responsibility for the administration and oversight of all of the center’s activities. Sullivan joined the Darden School from AQR Capital Management, the Greenwich, Connecticut, based investment management firm where he served as vice president and head of investment content. An investment industry publishing leader with an extensive track record of developing and communicating innovative research and ideas, Sullivan helped establish and led the firm’s editorial board and also was a founding member of the AQR Asset Management Institute at London Business School. Prior to joining AQR, Sullivan worked as head of publications and editor of the Financial Analysts Journal at the CFA Institute for more than 10 years, including oversight responsibilities for a suite of publication services aimed at the investment community. A Chartered Financial Analyst, Sullivan holds a bachelor’s and master’s degree in economics from Virginia Commonwealth University. He lives in Charlottesville with his family and currently serves on the editorial board of the Journal of Alternative Investments.

Image of Luis Garcia Feijóo
Luis Garcia-Feijóo CFA, CIPM

Dr. Luis García-Feijóo, CFA, CIPM, is an associate professor of finance at Florida Atlantic University (FAU), where he teaches investments and international finance. He also serves as associate editor of the Financial Analysts Journal and as associate research director for CFA Institute Research Foundation. Prior to joining FAU, Dr. García worked as director, exam development, at CFA Institute, and was an associate professor at Creighton University. He has published his research in leading academic and practitioner journals, such as the Journal of Finance, Review of Asset Pricing Studies, Journal of Banking and Finance, Financial Analysts Journal, and Journal of Portfolio Management. Dr. García is co-author of the book Invest with the Fed: How to Maximize Portfolio Performance following Federal Reserve Policy. He holds a PhD in finance from the University of Missouri-Columbia. Dr. García actively served on the Board of Directors of the CFA Society of South Florida from 2009 to 2014 and has been an active volunteer for CFA Institute since 2009.

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