Bridge over ocean
1 January 2011 Financial Analysts Journal Volume 67, Issue 1

Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly

  1. Malcolm Baker
  2. Brendan Bradley
  3. Jeffrey Wurgler

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.

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