The observation that low-volatility and low-beta stocks have delivered similar or better risk-adjusted returns than high-volatility stocks, contradicting a simple risk-return relationship.
Standard theory says higher beta should earn higher return. Measured over long samples the relationship is flat or slightly inverted, with the highest-volatility decile earning notably poor returns.
The usual explanation is leverage aversion: investors who want higher returns but cannot or will not borrow bid up volatile stocks instead, overpaying for the embedded leverage. A related explanation is the lottery preference for names with a small chance of a very large gain.
Practical cautions: low-volatility portfolios end up concentrated in a few defensive sectors, behave like a bond proxy and can suffer when rates rise sharply, and became crowded enough after 2012 that valuations within the group moved well above their historical range. See factor-crowding.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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