Abstract
There are two approaches to achieving low-risk global equity strategies: a portfolio of low-risk stocks and a low-risk portfolio of stocks. The authors analyze the impact of incorporating expected return to these two low-risk approaches. They find that a portfolio of low-risk stocks and a low-risk portfolio of stocks are equally effective in their ability to reduce realized volatility relative to the market-capitalization-weighted benchmark over an intermediate- to long-term investment horizon. Nevertheless, the portfolios’, average monthly excess returns relative to the market-capitalization-weighted index for the period December 31, 1996, to September 30, 2016, are not statistically significant. However, incorporating expected return to both portfolios results in statistically significant average monthly relative outperformance. Furthermore, they illustrate that expected return based on multi-factor quantitative screens, including valuations, is beneficial to investors in avoiding overpaying for a low-risk strategy in a risk-off environment.
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