High Returns from Low Risk: A Remarkable Stock Market Paradox
by Pim van Vliet and Jan de Koning
Overview
Published in 2017 by John Wiley & Sons, this book by Pim van Vliet (head of Robeco's Conservative Equities team) and Jan de Koning documents one of the most persistent anomalies in financial markets: low-risk stocks outperform high-risk stocks over long time periods, directly contradicting the fundamental assumption that higher risk should be compensated with higher returns.
The Paradox
Standard financial theory (CAPM) predicts a positive linear relationship between risk and return -- take more risk, earn more return. The empirical evidence shows the opposite: low-volatility stocks have delivered higher returns than high-volatility stocks across multiple decades, countries, and asset classes. This is the "low-volatility anomaly" or "volatility paradox."
Why It Persists
The book explores several explanations:
- Behavioral biases: Investors are attracted to "lottery-like" high-volatility stocks and overpay for them.
- Benchmarking: Professional fund managers are evaluated relative to benchmarks, creating incentives to take more risk, not less.
- Leverage constraints: Many investors cannot use leverage, so they substitute high-beta stocks for leveraged exposure to low-beta stocks.
- Attention and overconfidence: High-volatility stocks attract more media attention and analyst coverage.
Practical Application
Van Vliet presents a systematic low-volatility investing approach that combines low risk with additional quality and momentum factors to build portfolios that deliver equity-like returns with bond-like risk. The book uses accessible examples (the "tortoise beats the hare" metaphor) to make quantitative concepts understandable.
Evidence
The empirical evidence spans over 90 years of U.S. data and decades of international data, making this one of the most robust and well-documented anomalies in finance. The book presents this evidence in an accessible format aimed at both institutional and retail investors.
