A Case For Active Investing In Low Volatility Equity
September 14, 2015
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Return Generation
One of the more compelling arguments for investing in an active low volatility strategy is the ability of an active manager to infuse return forecasts into the portfolio construction process. In fact, the passively managed minimum variance portfolio, which selects stocks solely based on their squared standard deviation, takes the extreme and naïve view that every stock has the same expected return. In contrast, an active manager can favor stocks with higher expected returns.
Our research suggests adding a return expectation to a low volatility strategy potentially increases returns by enhancing the upside capture with little to no impact on downside capture—and with little to no impact on overall portfolio risk.