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Notices
Bridge over ocean
1 January 2011 Financial Analysts Journal Volume 67, Issue 1

Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly

Malcolm Baker, Brendan Bradley, and Jeffrey Wurgler

Contrary to basic finance principles, high-beta and high-volatility stocks have
long underperformed low-beta and low-volatility stocks. This anomaly may be
partly explained by the fact that the typical institutional investor’s
mandate to beat a fixed benchmark discourages arbitrage activity in both
high-alpha, low-beta stocks and low-alpha, high-beta stocks.

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