Restoring Value to Minimum Variance
Overview
Over the past few years, investors have been keenly drawn to strategies that promise to lower equity portfolio risk. This article examines one popular low-risk strategy, minimum variance, which optimizes a basket of stocks to deliver the lowest possible portfolio variance. The authors examine the underlying factor exposure of a minimum variance portfolio over time and show the potential danger of ignoring current pricing. With low-volatility stocks reaching unusually high pricing levels by historical standards, research found that by adding a value tilt to the portfolio investors can achieve low volatility at a reasonable price.