Finance theory says more risk should bring more return. The low-volatility anomaly turns this assumption on its head: less volatile stocks have delivered better risk-adjusted returns than highly volatile ones over the long term. This finding has been documented since the 1970s and confirmed across global markets.
What Is the Low Volatility Anomaly?
The traditional CAPM model predicts that high-beta (high-risk) stocks should earn higher expected returns. However, Baker, Bradley, and Wurgler's 2011 study showed that low-volatility stocks outperformed high-volatility ones on both an absolute and risk-adjusted basis. Reasons include leverage constraints, institutional benchmark dependency, and retail investor overdemand for lottery-like stocks.
How It Works on BIST
Borsafolio's low-volatility portfolio selects the 20 stocks with the lowest 21-day annualized standard deviation. This simple strategy suits defensive investors who want low drawdowns. However, pure low-vol strategies have a weakness: they can select stocks that are simply declining slowly.
Volatility + Trend Filter
To address this weakness, a dual filter is applied: first, only stocks with positive 63-day momentum factor are eligible, then the 20 lowest-volatility names from that subset are selected. This hybrid approach avoids catching falling knives while preserving the protection of low volatility. Backtest results show this combination produces a higher Sharpe ratio than pure low-vol.
Who Is It For?
Low-volatility strategies appeal to conservative investors protecting retirement savings; tactical investors defending their portfolio during downturns; and anyone who wants to sleep well at night. In strong bull markets, low-vol will lag the broader market — this is a structural feature, not a flaw.
Related articles: What Is Factor Investing?, 10-Year BIST Factor Analysis, What Is Risk Parity?, Diversification.
