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Answer: The strategies tend to have significant alphas relative to standard market capitalization benchmarks.
## Explanation Low volatility strategies are known to exhibit the **low-volatility anomaly**, where stocks with lower volatility tend to outperform stocks with higher volatility on a risk-adjusted basis. When measured against standard market capitalization benchmarks (which are typically weighted by market cap and thus have higher exposure to high-volatility stocks), low volatility strategies often show **significant positive alphas**. **Key points:** - **Option A is correct**: Low volatility strategies typically generate significant positive alphas relative to standard market cap benchmarks because these benchmarks are dominated by high-volatility stocks that underperform on a risk-adjusted basis. - **Option B is incorrect**: Low volatility strategies don't necessarily have negative alphas relative to dynamic factors like value or momentum; they may have different factor exposures but not systematically negative alphas. - **Option C is incorrect**: The statement about high alphas over risk-free rate but negligible alphas over other benchmarks doesn't accurately describe the performance characteristics of low volatility strategies. - **Option D is incorrect**: The performance of low volatility strategies doesn't systematically depend on whether the benchmark is risk-adjusted or not. The low-volatility anomaly is well-documented in financial literature and represents one of the persistent market inefficiencies that low volatility strategies aim to exploit.
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A portfolio manager at a pension fund is presenting on investment strategies during a training for newly-hired portfolio analysts. The manager discusses low volatility strategies, illustrates historical performance measures of firms that apply these strategies, and draws attention to the benchmarks used. Which of the following statements about low volatility strategies would be correct for the manager to make during the presentation?
A
The strategies tend to have significant alphas relative to standard market capitalization benchmarks.
B
The strategies tend to have negative alphas relative to dynamic factors such as value or momentum.
C
The strategies tend to generate high alphas over the risk-free rate but negligible alphas over any other benchmark.
D
The strategies tend to generate low alphas if the benchmark used is adjusted for risk and high alphas otherwise.
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