Are South African equity investors rewarded for taking on more risk?
Date
2019-09-25
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
AOSIS
Abstract
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.
Description
CITATION: Steyn, J. P. & Theart, L. 2019. Are South African equity investors rewarded for taking on more risk? Journal of Economic and Financial Sciences, 12(1):a448, doi:10.4102/jef.v12i1.448.
The original publication is available at https://jefjournal.org.za
The original publication is available at https://jefjournal.org.za
Keywords
Stockholders -- Decision making -- South Africa, Stocks -- Rate of return -- South Africa, Stocks -- Risk assessment -- South Africa
Citation
Steyn, J. P. & Theart, L. 2019. Are South African equity investors rewarded for taking on more risk? Journal of Economic and Financial Sciences, 12(1):a448, doi:10.4102/jef.v12i1.448.