17 May 2013
Integrating a new risk factor into equity investment
Equity investors have been cognizant for decades of a number of risk factors that contribute towards explaining the behaviour of equity markets. The recent past has cast doubts upon basic finance principles and drawn out into the light an additional factor that investors should integrate into their analysis.
The volatility factor runs counter to traditional portfolio theory which stipulates that an investor should be rewarded in proportion with the risk taken. Our study looks to use the volatility factor as a building block to construct more resilient equity portfolios while also providing insight around the durability of a financial anomaly - namely that low volatility stocks perform as well as high volatility stocks while by definition taking on far lesser risk.