As we have discussed before, one of the major problems for the first formal asset pricing model developed by financial economists, the capital asset pricing model (CAPM), was that it predicts a positive relation between risk and return. But empirical studies have found the actual relation to be flat, or even negative.
Over the past five decades, the most “defensive” stocks have furnished higher returns than the most “aggressive” stocks. In addition, defensive strategies (at least those based on volatility) have delivered significant Fama-French three-factor and four-factor alphas.
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