Original Research

Are South African equity investors rewarded for taking on more risk?

Johannes P. Steyn, Lomari Theart
Journal of Economic and Financial Sciences | Vol 12, No 1 | a448 | DOI: https://doi.org/10.4102/jef.v12i1.448 | © 2019 Johannes P. Steyn, Lomari Theart | This work is licensed under CC Attribution 4.0
Submitted: 24 January 2019 | Published: 25 September 2019

About the author(s)

Johannes P. Steyn, Department of Business Management, Stellenbosch University, Cape Town, South Africa
Lomari Theart, Department of Business Management, Stellenbosch University, Cape Town, South Africa

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Orientation: It is rational for investors to expect additional compensation for an increased risk exposure. This positive risk–return relationship is in line with traditional financial theory; however, this relationship does not always hold in empirical research.

Research purpose: The aim of this article was to investigate the prevalence of the low-risk anomaly in the South African equity market.

Motivation for the study: If there is evidence of a low-risk anomaly, where low-risk shares outperform high-risk shares, then the additional return expectation of investors may be misplaced.

Research design/approach and method: A unique sampling procedure and an extended time frame were employed in a quintile portfolio analysis methodology.

Main findings: The article presents evidence that South African listed shares with low historical volatility earned higher risk-adjusted returns over the period July 2004 to September 2018. Low-volatility shares delivered a Sharpe ratio of 1.10 compared to 0.65 produced by the Financial Times Stock Exchange / Johannesburg Stock Exchange Shareholder Weighted Index over the same period.

Practical/managerial implications: The assumption that return in an investment portfolio could be enhanced by taking on more risk could be wrong. It seems that fund managers could potentially enhance returns and decrease risk in their portfolios by focussing on shares with low historical volatility.

Contribution/value-add: The negative relationship observed between volatility and return is inconsistent with theoretical expectations. Therefore, the results of this article suggest that investors are not rewarded for assuming higher levels of risk.


low risk; risk-adjusted return; volatility; beta; standard deviation; anomaly


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