Scientific Beta

In an article published in the CFA Institute's Enterprising Investor forum on 18 January, 2024, Joseph Simonian, PhD, Senior Investment Strategist at Scientific Beta, looks at how to build better low volatility equity strategies, which appeal to investors for many reasons. However, it is frequently overlooked that these strategies can be insufficiently diversified or risk controlled. 

In an article published in the CFA Institute's Enterprising Investor forum on 18 January, 2024, Joseph Simonian, PhD, Senior Investment Strategist at Scientific Beta, looks at how to build better low volatility equity strategies.

Low volatility equity strategies appeal to investors for many reasons. First, they help keep portfolios invested in equities during periods of market turmoil. Second, when well-constructed, they often exhibit higher risk-adjusted returns than their higher volatility counterparts.

While general surveys of low volatility strategies show that they do indeed shield investors from market-driven risk, what is frequently overlooked is that these same strategies can be insufficiently diversified or risk controlled. To that end, we examine the critical components of an effective low volatility portfolio construction process. These elements enable the construction of low volatility portfolios with more diversification and significantly better risk-adjusted returns than the standard low volatility strategy.

CFA Institute's Enterprising Investor is a forum for provocative and useful analysis of current issues in finance and investing.