Low Volatility Anomaly

The Low Volatility Anomaly refers to a surprising trend in investing where stocks with lower price fluctuations tend to perform better than higher-volatility stocks over time. Intuitively, one might think that riskier stocks should yield higher returns to compensate for their uncertainty. However, research shows that safer, less volatile stocks often generate better returns, challenging traditional finance theories. This behavior can be attributed to factors like investor psychology, market overreactions, and the tendency to underappreciate stability in uncertain environments. It suggests that a conservative approach to investing can be more rewarding than expected.