Explanation:
Low volatility strategies exploit the low volatility anomaly, where lower-risk stocks yield higher risk-adjusted returns than higher-risk stocks. As a result, when compared to standard, conventional market capitalization benchmarks, low volatility strategies typically produce significant positive alphas. However, when adjusting for multiple dynamic factors like value, profitability, or investment, the alpha can often be explained away, becoming insignificant rather than explicitly negative. Therefore, Option A is the most accurate statement.
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Q.51 During a training session for novice portfolio analysts, a seasoned portfolio manager from a pension fund delves into the subject of low volatility investment strategies. The manager uses past performance data from companies employing these strategies and explains the benchmarks applied. Which of the following assertions about low volatility strategies would be accurate for the manager to put forward during this session?
A
These strategies typically demonstrate significant alphas when compared to conventional market capitalization benchmarks.
B
When evaluated against dynamic factors such as value or momentum, these strategies usually yield negative alphas.
C
Over the risk-free rate, these strategies tend to yield high alphas, but when compared to any other benchmark, the alphas are insignificant.
D
These strategies usually generate low alphas if the benchmark is risk-adjusted and high alphas otherwise.
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