Low-Beta Stock Peformance Outshines High-Beta Cousins Over 5, 10, And 20-Year Periods Based Both On Academic Research And Actual Market Returns

Thursday, February 07, 2013 07:59
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Low-Beta Stock Peformance Outshines High-Beta Cousins Over 5, 10, And 20-Year Periods Based Both On Academic Research And Actual Market Returns

Tags: correlation | investment strategies | stocks

Low beta stocks are considered to also be low risk and low return. Surprisingly, their performance has outpaced their higher beta cousins—over decades.
 
Empirical evidence from the work of Dr. Robert Haugen during the 1970s is being cited by Research Affiliates’ director and head of research Feifei Li.

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The performances of the MSCI and S&P low-volatility indexes make the evidence much more than just academic.
 
Li shows in a recent paper that low-beta stocks have outperformed over 5, 10, and 20-year comparisons.
 
From mid-1991 to early 2012, a 20-year plus time horizon, the S&P low volatility index returned an average of 10.2% annually against a return of 8.7% for the S&P 500.
 
For both domestic and international equities, the low volatility stocks also resulted in much higher Sharpe ratios.
 
They also have average correlations of .4% to .5% with other major asset classes, smoothing out overall performance. Traditional large-cap equity strategies have a correlation of .6%.
 
One lag period in low-beta stock performance was during the dot com bubble in the late 1990s.
 
But in the bull market of 2003 – 2006, low-beta stocks showed superior performance with international stocks approaching annual returns of 30%.
 
Low-beta portfolios may provide less risk and higher return for investors seeking greater diversification and more attractive risk/return strategies.

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