BUSI 4502 Lecture Notes - Lecture 7: Undervalued Stock, Behavioral Economics, Efficient-Market Hypothesis
30 Aug 2018
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Document Summary
In an efficient market, level of risk will determine the level of return for investors. Above average returns is obtained by taking above average risk and risky stock have higher return. Previous studies have attempted to explain low risk anomaly based on behavioral finance. However, it is hard to support this theory using history of us stock return. Hence, the main purpose of this article is to review in more detail the long-term performance of low-risk portfolios, present behavioral explanation and discuss practical implications for investors and investment managers. The sample data are top 1,000 stocks based on market capitalization. Stocks are categorized into 5 groups based on trailing total volatility or trailing beta. It is found that high beta earned higher return while low beta earn lower return. After adjusting capm, low beta anomaly appears in both environments. High volatility portfolio has higher transaction cost of monthly rebalancing.
