The Low Volatility Anomaly: Why Boring Stocks Win

#The Anomaly That Shouldn't Exist

Finance theory says risk and return go together. Higher risk should mean higher returns. That's the foundational idea behind Modern Portfolio Theory.

But empirical evidence says otherwise.

Low-volatility stocks—the calm, boring ones—consistently outperform high-volatility stocks over the long term.

This is called the "low volatility anomaly," and it's one of the most robust findings in finance.

#The Academic Evidence

Ang et al. (2006): "The Cross-Section of Volatility and Expected Returns"

Andrew Ang and colleagues at Columbia published a landmark study in the Journal of Finance. They found:

• High-volatility stocks underperform low-volatility stocks by approximately 1% per month
• This holds across the U.S., international developed markets, and emerging markets
• The effect persists after controlling for other known factors

This isn't a small effect. It's one of the largest anomalies in the academic literature.

Frazzini & Pedersen (2014): "Betting Against Beta"

AQR's Andrea Frazzini and Lasse Pedersen extended the research, showing that low-beta (less market-sensitive) stocks outperform high-beta stocks.

Their "Betting Against Beta" (BAB) factor shows positive returns across 20+ asset classes.

#Why Does Low Volatility Work?

1. Lottery Ticket Preference

Investors love excitement. Volatile stocks feel like lottery tickets—they could double! This demand bids up prices beyond reasonable levels.

Low-volatility stocks are boring. Nobody brags about owning a utility company. This lack of demand keeps prices reasonable.

2. Overconfidence Bias

Investors are overconfident about their ability to pick winners among speculative stocks. They underestimate the difficulty and overestimate their skill.

3. Institutional Constraints

Professional fund managers are benchmarked to indices. If they want to beat the benchmark, they often load up on high-beta stocks.

This creates artificial demand for risky stocks and artificial selling pressure on safe stocks.

#How We Calculate Low Volatility

We use 60-day realized volatility:

Volatility = Standard Deviation of Daily Returns × √252

Why 60 days? - Long enough to be stable - Short enough to reflect current conditions - Standard institutional practice

We then invert the score—lower volatility gets a higher ranking.

#The Risk-Return Profile

Here's what makes low volatility special:

Low-volatility stocks win on both dimensions. They have better returns AND lower risk.

#The Bottom Line

The low volatility anomaly contradicts textbook finance but confirms real-world investing wisdom: boring beats exciting over time.

Lottery ticket stocks feel thrilling. Utility companies feel dull. But decades of evidence show which approach builds wealth.

See lowest-volatility stocks →

#Academic Sources

• Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). "The Cross-Section of Volatility and Expected Returns." Journal of Finance

• Frazzini, A., & Pedersen, L. H. (2014). "Betting Against Beta." Journal of Financial Economics

• Baker, M., Bradley, B., & Wurgler, J. (2011). "Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly." Financial Analysts Journal