F.A.Q.

Frequently Asked Questions about Low Volatility Stock investing and LowVolatilityStocks.com

 1.        What does the volatility number really mean?

Volatility is one measure of a stock’s risk.  It is based on the magnitude and frequency of changes in a stock’s price over a given period of time.

If your portfolio contains too many highly volatile stocks, it is subject to big swings in performance.  In a market decline, when high volatility stocks may plunge, low volatility stocks will typically retain more of their value. As a result you can preserve more of your capital in a down market and improve your overall performance in the long run.

 2.       How do you calculate volatility?

For our purposes, volatility is the standard deviation of monthly returns over a 2 year period of time.  We begin by computing each deviation from the mean return over the 24 preceding months.  We then square the deviations, add them up and divide by the number of observations minus one.  In a normal distribution, 2/3 of the observed returns should fall within 2 standard deviations of the mean.

 3.       What is the difference between variance and volatility? 

Volatility and Variance are both risk measures and are closely related.  Variance is computed as volatility squared.

4.       What is the difference between beta and volatility?

Beta is an additional measure of a stock’s risk.  It reveals a stock’s sensitivity to movements in the market.  Statistically, it is the co-variance of a stock’s returns with the market’s returns divided by the product of the standard deviation of the stock and the standard deviation of the market’s overall returns.

 5.       Low risk stocks outperforming is the complete opposite of what I was taught in business school.  How do you explain that?

The 2012 research paper by Nardin Baker and Bob Haugen addresses this question in great detail.  It is available free for download on the homepage of this site.

 6.       Will the lowest volatility (least risky) stocks always outperform the most risky ones?

Studies show that over time periods of more than 5 years, the least volatile stocks have always outperformed their riskier counterparts. This has been proven to be true in all markets, all over the world and has been studied for periods of time from 1926 through 2011.

The few brief periods when this was not so, were typically intense bull markets. An example is the dot com bubble when the market was subject to (what Allen Greenspan termed) “irrational exuberance.”

 Research also shows that trading these stocks no more frequently than once per quarter produces better returns than a monthly trading strategy.

7.       Why aren’t all the stocks on the NYSE, NASDAQ, and other US and European exchanges included in your reports?

Some stocks are too small and some are traded too infrequently to produce an accurate picture of their true volatility.  We also require that at least 2 years of data be available before including a stock in our universe.

8.       What will you do with my email address?  Will you sell my information to others?

Your email address will be used to notify you when new reports, tools or information regarding the Low Volatility Anomaly are posted on the site.  Under no circumstances will we ever sell or share any personal information we collect from you without your explicit permission to do so.

 9.   Do you have plans to offer more investing tools in the future?

We are in the process of creating interactive tools to assist you in analyzing, modifying and constructing a portfolio that considers each stock’s volatility and the volatility of the portfolio as a whole.

 10.  When are the volatility reports generated and released?

Volatility Ranking Reports are updated on the first of every month.