The post ties in with this sites’ summary on implicit subsidies, particularly the section on equity markets. Headings, cursive text and text in brackets have been added. The post is based on Alquist, Ron, Andrea Frazzini, Antti Ilmanen, and Lasse Heje Pedersen (2020), “Fact and Fiction about Low-Risk Investing”. Empirical research suggests that low-risk strategies have delivered significant risk-adjusted returns for nearly a century and that this performance has not deteriorated over time. Popular versions of this strategy principle include “betting against beta”, “betting against correlation”, “stable minus risky” or “quality minus junk”. The rationale for low-risk strategies is that leverage is not available for all investors (but required to increase the weight of low-risk longs) and that many investors pay over the odds for assets with lottery-like upwardly skewed return expectations. The measure of risk can be based on price statistics, such as volatility and market correlation, or fundamental features. Low-risk investment strategies prefer leveraged low-risk assets over high-risk assets.
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