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The Journal of Portfolio Management

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The Low-Risk Anomaly: How Much Is a Good Risk Estimate Worth?

Tony Barchetto, Razvan Pascalau and Ryan Poirier
The Journal of Portfolio Management November 2020, jpm.2020.1.183; DOI: https://doi.org/10.3905/jpm.2020.1.183
Tony Barchetto
is founder and chief executive officer of Salt Financial
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Razvan Pascalau
is with SUNY Plattsburgh in Plattsburgh, NY
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Ryan Poirier
is director of Index and Product Research at Salt Financial
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Abstract

Many academics and practitioners rely on standard, relatively basic methods to estimate and manage portfolio risk. This can affect an investment manager’s ability to accurately target lower volatility stocks designed to exploit the well-documented low-risk anomaly. This article finds a hybrid risk estimate that mixes short-, medium-, and long-term variances, leads to superior ex post information ratios and alphas by properly aligning securities in the correct order (low risk to high risk). This risk estimate may be worth between $420 million and $1.9 billion annually, calculated from the overall size ($75 billion) of the market. The significance of this estimate survives transaction costs, various time periods, and risk factor exposures.

TOPICS: Factors, risk premia, factor-based models, passive strategies, portfolio construction, risk management

Key Findings

  • • We propose an alternative way to built portfolios designed to exploit the low-risk anomaly.

  • • The alpha due to this alternative method alone is anywhere from $420 million and $1.9 billion annually, given the current size ($75 billion) of this market.

  • • The significance of this approach survives transaction costs, various time periods, and risk factor exposures.

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The Journal of Portfolio Management: 47 (3)
The Journal of Portfolio Management
Vol. 47, Issue 3
February 2021
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The Low-Risk Anomaly: How Much Is a Good Risk Estimate Worth?
Tony Barchetto, Razvan Pascalau, Ryan Poirier
The Journal of Portfolio Management Sep 2020, jpm.2020.1.183; DOI: 10.3905/jpm.2020.1.183

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The Low-Risk Anomaly: How Much Is a Good Risk Estimate Worth?
Tony Barchetto, Razvan Pascalau, Ryan Poirier
The Journal of Portfolio Management Sep 2020, jpm.2020.1.183; DOI: 10.3905/jpm.2020.1.183
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  • Article
    • Abstract
    • RISK ESTIMATION
    • EXPLOITING THE LOW-RISK ANOMALY
    • MODEL ERROR: FORECAST VERSUS RANK ORDER
    • PORTFOLIO PERFORMANCE SIMULATION
    • RESULTS
    • IMPLEMENTATION NET OF COST
    • CONCLUSION
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
  • Info & Metrics
  • PDF (Subscribers Only)
  • PDF (Subscribers Only)

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