Excess Returns, Ep. 27: Quality and Low Volatility: The Factors That Shouldn't Work

Investing factors that work over time typically do so for one of two reasons: they either produce an excess return by taking on additional risk or they benefit from the tendency of investors to systematically misprice certain types of securities. Factors like value and momentum are easy to explain using this framework, but the outperformance of quality and low volatility offers more of a challenge.

In this episode, we take an in depth look at these two factors. We discuss:

The different ways to define each factor and the common metrics used.
The explanations that explain the excess returns of both quality and low volatility.
The benefits each factor can provide when combined with the other major investing factors.