
Explanation:
The volatility anomaly refers to the empirical observation that, contrary to traditional asset pricing models like the Capital Asset Pricing Model (CAPM), stocks with lower historical volatility or beta tend to exhibit higher risk-adjusted returns compared to highly volatile stocks. While classical finance theory suggests that higher risk should be compensated with higher expected returns, low-volatility portfolios historically outperform high-volatility portfolios on a risk-adjusted basis.
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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