[[Start here]] → [[Sources]] → Low Risk Stocks Outperform --- The late Professor Robert Haugen wrote many great papers and books that debunked myths in finance and made the case for factor investing. “*Low Risk Stocks Outperform in All Observable Markets of the World*”[^1] in 2022 was Haugen’s attempt to debunk the idea that “risk bearing is expected to produce a reward”. As outlined in my note [[low risk stocks beat high risk stocks]], the risk/reward positive correlation may hold true across asset classes, but not within them. Haugen had been exploring these issues for a long time, but this paper summarised them. * The study investigates the period between 1990 and 2011. * 21 developed and 12 emerging countries analysed. * 99.5% of the global market cap including non survivors. Across all countries they found that the highest risk decile massively underperformed the lowest risk decile. ![[Haugen & Baker - Low Risk Stocks Outperform-1.png]] He also states that the “option like manager compensation” structure of fund management companies essentially reinforces risk-seeking behaviour. It creates “excess demand for more volatile stocks”. ![[Haugen & Baker - Low Risk Stocks - Option Like Manager Compensation.png]] He also shows that: * Institutions hold more volatile stocks * Analyst coverage is greater for more volatile stocks * news coverage is greater for more volatile stocks Hence over-pricing, and lower future returns. As always it’s really great reading as always from Haugen. ![[Haugen & Baker - Low Risk Stocks Outperform.png]] [^1]: [Low Risk Stocks Outperform within All Observable Markets of the World](http://ssrn.com/abstract=2055431) - Haugen/Baker 2012, SSRN