Profitability and low-risk anomalies reexamined

Abstract

This study re-examines the low-risk and profitability anomalies, which are often seen as closely related phenomena. The study uses a global dataset and cash flow return on investment (CFROI) as a profitability metric that allows comparison across sectors, regions, and time. The results confirm the low-risk anomaly and reveal that more profitable firms outperform over time when it comes to raw returns. When applying common risk factor models, the low-risk anomaly vanishes. However, the profitability effect is only subsumed by the Fama–French five-factor model that itself accounts for operating profitability. This study demonstrates that both anomalies represent distinct phenomena, although both exhibit some overlap in terms of underlying portfolio holdings.