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How volatility performs in the long term

Volatility, returns and the Sharpe ratio in U.S. and global equity markets

In early tests of the capital asset pricing model, studies verified that high-beta assets tend to compensate investors less than what the model predicts.

Following studies showed that typically the relationship between historical volatility and returns is either flat or inverted - referred to as the low volatility anomaly. The StarMine quantitative research team investigates this anomaly by studying stock returns and the Sharpe ratio for different volatility portfolios.

In this paper the StarMine research team also considers different time periods and how the returns change when market capitalization weights and different volatility look-back periods are taken into account.

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Key content

Volatility

We study the results of stock returns by volatility portfolio

Sharpe ratio

Analysis of how the Sharpe ratio relates to trailing volatility

Sub-period analysis

We look at how the low volatility phenomenon behaves during sub-periods

Market weight capitalization

Our analysis investigates how results are affected when market weights are changed