Equity Factor Investing: Low Risk

Abstract

The low risk factor, also referred to as the ‘low volatility’ factor, is the story of the risk-return anomaly in finance literature and the finance industry. It is still the largest anomaly in theoretical finance (it is no surprise to practical investors) and remains the one with the most possibilities to explore in the coming years. This factor targets securities or portfolios with low risk characteristics. This chapter offers insights into low risk factor investing, how these strategies are constructed and why the anomaly exists from a behavioural finance and market structure perspective. This factor is becoming an integral part of the decision-making process of portfolio construction and is increasingly available in exchange traded funds and other index funds on the back of increasing demand from institutional, retail investors and asset allocators.