The maximum-return-and-minimum-volatility effect: evidence from choosing risky and riskless assets to form a portfolio

Zhihui Lv, Amanda M. Y. Chu, Wing-Keung Wong and Thomas C. Chiang
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Zhihui Lv: Guangdong University of Foreign Studies
Amanda M. Y. Chu: The Education University of Hong Kong
Thomas C. Chiang: Drexel University

Risk Management, 2021, vol. 23, issue 1, No 5, 97-122

Abstract: Abstract The healthcare sector has the highest mean and a low correlation with the business cycle, while Treasury Bills (T-Bills) have the lowest variance in our study. In this paper, we examine the conjecture of whether investors should choose an asset with the highest expected return and an asset with the smallest variance even when the mean–variance rule says “NO”. We examine the conjecture by comparing the performance of portfolios with and without healthcare and 6-M T-bills in the US market. Our findings support the conjecture that investors prefer to invest in portfolios with both healthcare and 6-M T-bills. In addition, we find an arbitrage opportunity in the markets and our findings reject market efficiency. Based on our findings, academics could incorporate both maximum-return and minimum-volatility assets to construct a maximum-return-and-minimum-volatility aggressive-and-yet-defensive trading approach that stochastically dominates most of other assets/portfolios. Thus, our findings can be called the maximum-return-and-minimum-volatility anomaly or the maximum-return-and-minimum-volatility puzzle, or the maximum-return-and-minimum-volatility paradox.

Keywords: Healthcare sector; Treasury bills; Portfolio optimization; Mean-risk rules; Stochastic dominance (search for similar items in EconPapers)
JEL-codes: C4 D81 G11 I10 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.1057/s41283-021-00069-4

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