Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly
Posted: 23 Jan 2011
Date Written: January 21, 2011
Contrary to basic finance principles, high-beta and high-volatility stocks have long underperformed low-beta and low-volatility stocks. This anomaly may be partly explained by the fact that the typical institutional investor’s mandate to beat a fixed benchmark discourages arbitrage activity in both high-alpha, low-beta stocks and low-alpha, high-beta stocks.
Keywords: Behavioral Finance, Behavioral Biases, Limits to Arbitrage, Equity Investments, Portfolio Management: Risk Management
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