Tuesday, November 29, 2011

Low Risk outperforms High Risk

On CNBC, I have said this for the past 11 years: Always go for blue chips. Keep risk at minimum. Be a conservative trader. The reason is simple: Low risk is more profitable than high risk.

Now, Engineering Returns  - says that "Low volatility (low risk) outperforms high volatility (high risk) on an absolute as well as risk adjusted basis.". Read the full post Here.

Surely, this is common sense. Let us talk about a person crossing the street. The person can cross at the zebra crossing (low risk), or he can cross the street at random (high risk).  What will you do?

The study referred above suggests that stocks that have high volatility are not always profitable in trading. Stocks with low volatility, outperform the high volatility stocks. Again, let us take some practical examples. High volatility stocks include VIP Inds, Educomp, Sintex, while a low key, low volatility stock example is Hind Unilever. It is no surprise to find that Hind Unilever has outperformed the Highly volatile concept stocks.


Gullapalli Sankara said...

Crossing at zebra marks is not a good idea particularly when one is at a far away from zebra mark. Crossing at other places can also be tried if traffic is low, vision upto suitable distance is not hindered by bends etc, if one is energitic, if the destination is nearer than zebra crossings etc.
But one should be careful and shall not be done in a hurry.
It can save time and effort.
I feel Crossing at zebra marks is like investing in bonds, fixed deposits etc.

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