Programs & Events
Event Details
Event Details
- Webinars: Trending@HBS
- Virtual
The Low Risk Anomaly: Implications for Investment, Asset Allocation, and Corporate
Finance
Malcolm P. Baker (PhDBE 2000), Robert G. Kirby Professor of Business Administration, Harvard Business School
Related Readings:
- "Do Strict Capital Requirements Raise the Cost of Capital? Bank Regulation, Capital Structure and the Low Risk Anomaly"
- "The Low-Risk Anomaly: A Decomposition into Micro and Macro Effects"
- "Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly"
- "The Risk Anomaly Tradeoff of Leverage."
One of the basic principles of finance is that, in competitive and efficient markets, investors earn higher average returns only by taking greater risks. Asset classes follow this pattern: Stocks have returned more than bonds, and bonds have returned more than cash. But, within the stock market, the pattern is reversed. Low-risk stocks, whether measured by volatility or market beta, have outperformed high-risk stocks, on average, in 80 years of US stock market history and in 30 years of international data. Drawing on his research, Professor Baker will describe the behavioral and institutional explanations for this anomaly and discuss the potential implications.