Finance theory suggests that higher return comes with higher risk. This paper examines low risk anomaly in Indian stock markets by using the constituent stocks of S&P CNX 500 index of NSE for a 11-year period starting from 2001 to 2011. Monthly rolling iterations are used to form low and high volatility portfolios. The findings of the study endorse the presence of low risk anomaly in Indian stock markets as low volatility portfolio outperforms market portfolio as well as its high volatility counterpart on risk-adjusted basis. The results are consistent with those of Clarke et al. (2006a and 2006b) and others for developed markets.

According to the Markowitz ‘modern portfolio theory’ (Markowitz, 1952) and Capital Asset Pricing Model (CAPM), there is a direct relationship between risk and expected return. Higher required return comes with higher risk. In an efficient market, investors realize aboveaverage returns only by taking above-average risks. Thus, investors who seek higher return need to take higher risk. It is believed that the so-called market portfolio is one of the efficient portfolios lying on the efficient frontier of risky portfolios offering highest possible return at a given level of risk. In fact, each portfolio on this efficient frontier offers different risk-return combinations, but the same utility, and therefore, the investor who wants higher return can choose a portfolio with higher risk and higher return combination, whereas a riskaverse investor may choose a low risk-low return portfolio on the efficient frontier.

It is believed that market portfolio gives highest excess return at a given level of risk as measured by Sharpe ratio1. However, recently found low volatility and minimum variance investment strategies show that portfolios with low volatility generate higher risk-adjusted returns. Now, the next question which immediately comes to mind is: Is it possible to have portfolios which give returns greater than high volatility portfolio and market portfolio with lesser risk? Is it possible to have a portfolio, as shown in Figure 1, which lies above the Capital.

Financial Risk Management Journal, Low Risk Anomaly, Enemy of Market Efficiency, Capital Asset Pricing Model (CAPM), Greater Returns, Monthly Rebalancing, Quantitative Approach.