Stocks: Least Risk Stocks = More Reward?

[Listener2307]

.................. U.S. stocks from 1970 to 2011, and what the researchers found is surprising: The riskiest 25 percent of stocks—those most vulnerable to swings of the broad market—logged an average annual return of just over 7 percent per year. The least-risky 25 percent of stocks returned 10.6 percent per year..............

Is this ground breaking news?He's talking about a 41 year period, and he's telling me that I should steer clear of stocks with a beta of greater than 1.
He also seems to have assumed that in 1970 I invested all the money I was going to invest.
How about it, fellow oldsters, did you have a lot of money to invest in 1970?

[Maddie104]

As I posted in another thread, beta is an important factor as one gets close to the distribution phase and comfort level at taking a distribution when a volatility is high. This past year best performers were healthcare and utility sectors, low volatility. The attached link lists the performance of DOW, S&P, NASDAQ, small-caps, mid-caps and sectors. Price change does not include dividends; DIA = 3.18%, SPY = 2.3%, QQQ = 1.09%.

Beta may not be as important in the accumulation stage.

My portfolio includes percentages from each ETF supplemented with individual dividend stocks, i.e., large cap pharma and individual bonds with various maturities so distributions can be taken from the relative best performers.

https://www.marketwatch.com/story/do...MW_latest_news

[mathjak107]

there was an interesting article on seeking alpha about low beta stocks . additional studies have show low beta stocks many times are low beta because the have low trading volume .

once they trade they jump up or down like crazy and are not really low beta .

https://seekingalpha.com/article/352...ow-beta-stocks

[TwoByFour]

Originally Posted by michiganmoon

The Real Stock Market Risk Is the One You Can't See - Businessweek

Something to think about. Any thoughts?

As others have said this is not a new result. What is interesting with this is the back story.

Most financiers and economists believe there is an inherent relationship between risk and return - investors will demand a higher return for more risk. This led to CAPM (for which Markowitz and Sharpe received a Nobel Prize) which says there is a linear relationship between risk (as measured with volatility) and return.

But over time people noticed what the GMO article pointed out: that the relationship is not linear, there are other things that affect returns. This led to the famous Fama-French model for returns, for which Fama won a Nobel Prize. That model also relies heavily on risk but includes two other "factors" in predicting returns.

Since then Fama-French has been found lacking also and now people are looking at models with 5-7 factors that are used to predict returns. There are some mutual funds that are built on this "factor investing" model, but volatility continues to be a key factor in all these models.

The bottom line is that it is not that high volatility stocks fail, it is that the risk-adjusted return of high volatility stocks is lower than the risk-adjusted return of low volatility stocks, on average, violating CAPM. But if you look at just the return, not the risk-adjusted return, it is higher for higher volatility stocks, on average, but clearly investors are not being sufficiently compensated for the risk they are taking with higher volatility stocks.