Rationale
The low volatility anomaly contradicts the hypothesis of efficient markets and the CAPM assumptions. Instead, several behavioral explanations have been advanced.
The lottery effect builds on empirical evidence that individuals take on bets that resemble lottery tickets with a small expected loss but a large potential win, even though this large win may have a fairly low probability. If investors perceive the risk-return profile of a low price, volatile stock as similar to a lottery ticket, then it could be an attractive bet. As a result, investors may overpay for high volatility stocks and underpay for low volatility stocks due to their biased preferences. The representativeness bias suggests that investors extrapolate the success ...
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