Practical analysis for investment professionals
14 May 2014

Micro and Macro Effects and the Low-Risk Anomaly (Podcast)

In the United States and around the world, low-beta stocks have outperformed high-beta stocks on a risk-adjusted basis. Ryan Taliaferro and his coauthors, Malcolm Baker and Brendan Bradley, decomposed this basic market inefficiency into a “micro” component and a “macro” component. They discuss the results of their research in their March/April 2014 article in the Financial Analysts Journal, “The Low-Risk Anomaly: A Decomposition into Micro and Macro Effects.”

We recently spoke with Taliaferro about his and his coauthors’ research.

The authors found that both the micro and the macro components — drawn from low-beta stocks and low-beta countries or industries, respectively — contribute to the anomaly. Their results have important implications for the construction of managed-volatility portfolios.

“The practical conclusion would be that the incremental value of industry and country selection, even holding stock level risk constant, is definitely present and measurable,” Taliaferro says, “and it suggests two things: (1) Using a risk model that includes country and industry effect rather than just simply sorting on stock level beta or volatility may be a better way to go, and (2) keeping constraints on industry and country exposure somewhat relaxed would, at least in the past, have generated higher risk-adjusted returns.”

To hear more about this article’s findings, listen to the full interview (above) or download the MP3.

CFA Institute members can access the full article on the CFA Institute Publications website.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Abby Farson Pratt

Abby Farson Pratt was an assistant editor at CFA Institute. Previously, she worked at the Denver Post and at the University of North Carolina Press. Pratt earned the Claritas™ Investment Certificate and holds a BA in journalism and English from the University of North Carolina at Chapel Hill.

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