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Matthias Knab, Opalesque: Wesley Gray, CEO/CIO of Alpha Architect, LLC writes on Harvest Exchange:
Jack and I had the honor of attending the Evidence-Based Investing conference , hosted by the team at Ritholz Wealth Management. What a great event and a great group of inspiring investors and thinkers.
One of the more "provocative" items we discussed was the use of low volatility as a signal for stock selection. Tom Brakke has me quoted as saying the following: "Right now, low-vol is expensive crap. You should be buying cheap crap."
Zero points for eloquence. Three points for simplicity.
At first glance, portfolios that sort on a low volatility signal have done well, historically. But further investigation into the subject suggests that a lot of the mojo in low-volatility is likely associated with the well established premias attached to value and momentum — not something incredibly unique and/or different. In fact, we covered a paper in May of this year (near the peak of low-vol relative performance) that makes this very point — low vol only adds a differentiated return when low vol stocks are cheap (quintile 5).
As you can see from Table 3, there is no alpha except in extreme cheap low vol stock environments.
The results are hypothetical results and are NOT an indicator of future results and do NOT represent retur...................... To view our full article Click here
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