A Tale of Two Anomalies: Higher Returns of Low-Risk Stocks and Return Seasonality

Prior studies have shown that low beta and low volatility stocks earn higher average returns than high beta and high volatility stocks, contradicting the prediction of the capital asset pricing model and the fundamental relationship between risk and return. In this paper, we demonstrate that this phenomenon is driven by the seasonality of stock returns. We show that the risk-return tradeoff does hold in the nonsummer months, and that switching to a portfolio of low-risk stocks in summer outperforms—both in terms of absolute and in risk-adjusted returns—buy and hold strategies as well as the Sell in May strategy of switching to treasury bills in summer.