The Volatility Effect: Lower Risk Without Lower Return

23 Pages Posted: 17 Apr 2007

See all articles by David Blitz

David Blitz

Robeco Quantitative Investments

Pim van Vliet

Robeco Quantitative Investments

Date Written: July 4, 2007


We present empirical evidence that stocks with low volatility earn high risk-adjusted returns. The annual alpha spread of global low versus high volatility decile portfolios amounts to 12% over the 1986-2006 period. We also observe this volatility effect within the US, European and Japanese markets in isolation. Furthermore, we find that the volatility effect cannot be explained by other well-known effects such as value and size. Our results indicate that equity investors overpay for risky stocks. Possible explanations for this phenomenon include (i) leverage restrictions, (ii) inefficient two-step investment processes, and (iii) behavioral biases of private investors. In order to exploit the volatility effect in practice we argue that investors should include low risk stocks as a separate asset class in the strategic asset allocation phase of their investment process.

Keywords: alpha, strategic asset allocation, volatility, volatility effect, low risk stocks, CAPM, Fama-French factors, international

JEL Classification: M, G3, H54

Suggested Citation

Blitz, David and van Vliet, Pim, The Volatility Effect: Lower Risk Without Lower Return (July 4, 2007). Journal of Portfolio Management, pp. 102-113, Fall 2007, ERIM Report Series Reference No. ERS-2007-044-F&A, Available at SSRN:

David Blitz

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3014 DA

Pim Van Vliet (Contact Author)

Robeco Quantitative Investments ( email )

Rotterdam, 3011 AG

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