Deka: Reducing the Risks in Equity Investment

The challenge for many institutional investors is how to maintain exposure to the promising returns that equities offer over the long term despite limited risk budgets and renewed market volatility. The focus has shifted away from outperforming benchmarks in bull markets and towards achieving a comfortable return by controlling absolute risks and avoiding extreme losses.

Equity investment provides highly attractive returns as compensation for the provision of risk capital to businesses to finance their productive assets. The higher the perceived market risks, for example from global growth or deflation, the higher the returns required by investors and the lower the levels of equity markets.

According to CAPM paradigm, the market is the only factor or driver that explains the expected return of a stock. However, empirical studies on low-volatility and low-beta stocks have found that these stocks earn above-average returns in the long run. This so-called low risk anomaly is attributed to the behavioral bias of managing relative risks to the benchmark.

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