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Explanation:
The volatility anomaly refers to the empirical finding that low volatility (and low beta) stocks tend to earn higher risk-adjusted returns compared to high volatility stocks. This contradicts the traditional Capital Asset Pricing Model (CAPM), which predicts that higher risk (systematic risk measured by beta) should be compensated with higher expected returns. Therefore, low volatility stocks earning higher risk-adjusted returns relative to the market portfolio best explains the volatility anomaly.
Q.4630 Which of the following statements best explains the volatility anomaly?
A
High volatility stock earns higher risk-adjusted returns relative to the market portfolio
B
Low volatility stock earns higher risk-adjusted returns relative to the market portfolio
C
Low beta implies low volatility risk exposure
D
None of the above
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