Finance theory suggests that higher return comes with higher risk. However, several studies have reported the evidences of low-risk anomaly in the US and other global markets, where portfolio of low volatility stocks delivers superior risk-adjusted returns as compared to market index and high volatility stocks’ portfolio. The present study aims to investigate the presence of low-risk anomaly in Indian stock market by using all constituent stocks of S&P CNX 200 index of NSE for the period from January 2004 to August 2013. The CNX 200 index represents about 88.75% of the freefloat market capitalization of the stocks listed on NSE as on June 28, 2013. The study is based on construction of low and high volatility portfolios using volatility of historical monthly returns of stocks and holding portfolios for the next period on iterative basis.

According to the Capital Asset Pricing Model (CAPM) (Sharpe, 1964), there is a linear relationship between risk and the expected return. Higher required return comes with higher risk. In an efficient market, investors realize above average returns only by taking above average risks. Thus, it is believed that the so-called market portfolio is on the efficient frontier of risky portfolios offering highest possible return at a given level of risk.

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 (LV) and Minimum Variance (MV) investment strategies show that portfolios with low volatility generate higher risk-adjusted returns. The LV investment strategy sorts all the stocks by their volatility and/ or beta and then takes a subset of these stocks comprising those with the lowest beta and/or volatility. These investment strategies have been noteworthy in the sense that they have been able to deliver higher absolute returns as well as risk-adjusted returns over time.

Financial Risk Management Journal, Risk Anomaly, Empirical Evidence, Capital Asset Pricing Model (CAPM), Low Volatility (LV), Minimum Variance (MV), Frequency of Rebalancing, Indian Stock Market.