The sustainable investor for a changing world

Portfolio perspectives | Article - 2 Min

Evidence of the low volatility anomaly

It is relatively easy to demonstrate the low volatility anomaly – the phenomenon that first came to light half a century ago showing that investing in higher risk equities is not necessarily rewarded with higher returns. Raul Leote de Carvalho explains.[1]  

Here is a relatively simple example. Ranking stocks by their three-year historical volatility and then dividing this universe into quintiles[2] from the least volatile to the most volatile every month, we can build five equally weighted equity portfolios.

While the volatility of the quintiles portfolios differs significantly (see Exhibit 1), the same cannot be said about their returns: Over this period, the returns of higher volatility stocks was practically the same as that of the least volatile stocks.

Higher risk-adjusted returns

In turn, Sharpe ratios, i.e., the average returns in excess of cash divided by volatility, are inversely proportional to volatility, with the higher Sharpe ratio for the least volatile stocks and the lowest Sharpe ratio for the most volatile stocks.

Basis: MSCI World index, Jan 2003 through May 2022; monthly returns in USD; rebalanced monthly. Source: BNP Paribas Asset Management, MSCI, FactSet, Bloomberg. For illustrative purposes only

We believe the results shown in Exhibit 1 are robust. Similar conclusions would be found by changing the period used in the simulations, for example, by extending it further into the past.

Such results can be found practically everywhere in developed and emerging stock markets, in different regions and even in different sectors of activity as we showed in our 2015 paper “Low risk anomaly everywhere: evidence from equity sectors” in the book “Risk Based and Factor Investing”.

Mitigating investment risks

BNP Paribas Asset Management has been among the leaders in factor-investing solutions[3] — including low-volatility investing — since 2009, as we seek to serve investors keen to diversify their portfolios and target higher risk-adjusted returns.

Our low-volatility strategies aim to improve risk-adjusted returns compared to traditional market capitalisation indices. We do this by systematically exploiting low-volatility alpha and mitigating investment risks over the long term.

Integrating sustainability-related objectives has become crucial in meeting investor expectations and needs. That is why our quantitative investment team has these two objectives: 

  • Increase the portfolio’s score on environmental, social and governance (ESG) criteria relative to the ESG enhanced index (the benchmark minus 20% of stocks with the worst ESG scores)
  • Reduce the carbon footprint of portfolios by 50% relative to the benchmark’s carbon footprint. 

For our low-volatility strategies, sustainability-related investing acts as a third dimension. Investors can tailor their investments based on these objectives: 

  • The return they expect
  • The risk they are willing to take
  • The sustainability-related objectives they seek. 


1 Also read: The low volatility anomaly – Still going strong after 50 years 

2 Five equal parts, each being 1/5th (20%) of the range

3 For more on factor investing, go to Factor investing – BNPP AM Luxembourg professional investor ( or the relevant pages of your country website 


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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