Risk and Return Revisited

Risk and return are correlated, but not in the way many investors think

Shannon Zimmerman 29 March, 2012 | 3:39PM

To generate better returns, investors should take on more risk, right? The answer may seem obvious, but historically, it's depended on what the meaning of the word "risk" is.

In an absolute sense, it's of course true that the more money investors put at risk, the more they'll gain if their investments increase in value. However, with the kind of risk that's become synonymous with volatility in investment argot, the opposite has been true. On average, high-beta investments--those whose prices have swung wider than an index over a given period of time--have historically generated worse returns than less-volatile alternatives.

The pattern has been persistent. A study that appeared last year in the CFA Institute's Financial Analysts Journal found that between 1968 and 2008, a portfolio comprising the least-volatile quintile of the market's 1000 largest stocks swamped the most-volatile quintile over the course of 40 years. And in a 2011 paper by Lasse Pedersen and Andrea Frazzini, the duo find better risk-adjusted returns resulting from "betting against beta" across a broad range of asset types and geographic boundaries over a 50-year time frame.

History doesn't always repeat itself. But over a lengthy stretch of time, investors have fared better by taking on less risk, not more.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Shannon Zimmerman  Shannon Zimmerman is an associate director of fund analysis at Morningstar.

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites