Are South African equity investors rewarded for taking on more risk?
Orientation: It is rational for investors to expect additional compensation for an increased risk exposure. This positive risk–return relationship is in line with traditional financial theory; however, this relationship does not always hold in empirical research. Research purpose: The aim of this a...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
AOSIS
2019-09-01
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| Series: | Journal of Economic and Financial Sciences |
| Subjects: | |
| Online Access: | https://jefjournal.org.za/index.php/jef/article/view/448 |
| _version_ | 1818336441637273600 |
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| author | Johannes P. Steyn Lomari Theart |
| author_facet | Johannes P. Steyn Lomari Theart |
| author_sort | Johannes P. Steyn |
| collection | DOAJ |
| description | Orientation: It is rational for investors to expect additional compensation for an increased risk exposure. This positive risk–return relationship is in line with traditional financial theory; however, this relationship does not always hold in empirical research.
Research purpose: The aim of this article was to investigate the prevalence of the low-risk anomaly in the South African equity market.
Motivation for the study: If there is evidence of a low-risk anomaly, where low-risk shares outperform high-risk shares, then the additional return expectation of investors may be misplaced.
Research design/approach and method: A unique sampling procedure and an extended time frame were employed in a quintile portfolio analysis methodology.
Main findings: The article presents evidence that South African listed shares with low historical volatility earned higher risk-adjusted returns over the period July 2004 to September 2018. Low-volatility shares delivered a Sharpe ratio of 1.10 compared to 0.65 produced by the Financial Times Stock Exchange / Johannesburg Stock Exchange Shareholder Weighted Index over the same period.
Practical/managerial implications: The assumption that return in an investment portfolio could be enhanced by taking on more risk could be wrong. It seems that fund managers could potentially enhance returns and decrease risk in their portfolios by focussing on shares with low historical volatility.
Contribution/value-add: The negative relationship observed between volatility and return is inconsistent with theoretical expectations. Therefore, the results of this article suggest that investors are not rewarded for assuming higher levels of risk. |
| first_indexed | 2024-12-13T14:39:22Z |
| format | Article |
| id | doaj.art-d7af0bbb5bea45eca9db8d554d077a76 |
| institution | Directory Open Access Journal |
| issn | 1995-7076 2312-2803 |
| language | English |
| last_indexed | 2024-12-13T14:39:22Z |
| publishDate | 2019-09-01 |
| publisher | AOSIS |
| record_format | Article |
| series | Journal of Economic and Financial Sciences |
| spelling | doaj.art-d7af0bbb5bea45eca9db8d554d077a762022-12-21T23:41:39ZengAOSISJournal of Economic and Financial Sciences1995-70762312-28032019-09-01121e1e1010.4102/jef.v12i1.448373Are South African equity investors rewarded for taking on more risk?Johannes P. Steyn0Lomari Theart1Department of Business Management, Stellenbosch University, Cape TownDepartment of Business Management, Stellenbosch University, Cape TownOrientation: It is rational for investors to expect additional compensation for an increased risk exposure. This positive risk–return relationship is in line with traditional financial theory; however, this relationship does not always hold in empirical research. Research purpose: The aim of this article was to investigate the prevalence of the low-risk anomaly in the South African equity market. Motivation for the study: If there is evidence of a low-risk anomaly, where low-risk shares outperform high-risk shares, then the additional return expectation of investors may be misplaced. Research design/approach and method: A unique sampling procedure and an extended time frame were employed in a quintile portfolio analysis methodology. Main findings: The article presents evidence that South African listed shares with low historical volatility earned higher risk-adjusted returns over the period July 2004 to September 2018. Low-volatility shares delivered a Sharpe ratio of 1.10 compared to 0.65 produced by the Financial Times Stock Exchange / Johannesburg Stock Exchange Shareholder Weighted Index over the same period. Practical/managerial implications: The assumption that return in an investment portfolio could be enhanced by taking on more risk could be wrong. It seems that fund managers could potentially enhance returns and decrease risk in their portfolios by focussing on shares with low historical volatility. Contribution/value-add: The negative relationship observed between volatility and return is inconsistent with theoretical expectations. Therefore, the results of this article suggest that investors are not rewarded for assuming higher levels of risk.https://jefjournal.org.za/index.php/jef/article/view/448low riskrisk-adjusted returnvolatilitybetastandard deviationanomaly |
| spellingShingle | Johannes P. Steyn Lomari Theart Are South African equity investors rewarded for taking on more risk? Journal of Economic and Financial Sciences low risk risk-adjusted return volatility beta standard deviation anomaly |
| title | Are South African equity investors rewarded for taking on more risk? |
| title_full | Are South African equity investors rewarded for taking on more risk? |
| title_fullStr | Are South African equity investors rewarded for taking on more risk? |
| title_full_unstemmed | Are South African equity investors rewarded for taking on more risk? |
| title_short | Are South African equity investors rewarded for taking on more risk? |
| title_sort | are south african equity investors rewarded for taking on more risk |
| topic | low risk risk-adjusted return volatility beta standard deviation anomaly |
| url | https://jefjournal.org.za/index.php/jef/article/view/448 |
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