Abstract
It is possible that some investors make the mistake of buying high and selling low. This may create which might allow some smart beta strategies to exploit the behavior gap by buying low and selling high. Live data suggests 1) the value-added from exploiting dumb volatility has been about 2-4% per year, 2) dumb volatility strategy risk-adjusted-returns have been similar, 3) there could be a volatility frontier offering more return from dumb in exchange for more and 4) some dumb volatility strategies have achieved Warren Buffett-like value-added. A six factor model shows no evidence that traditional factors, such as size and value, drove the dumb volatility return. Going forward, the ability of a strategy to absorb capital will be an important economic moat.
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