How to obtain high returns with lower volatility in emerging markets?

• Main Author: Nipun Agarwal
• Format: Article
• Language: English
• Published: Taylor & Francis Group 2014-12-01
• Series: Cogent Economics & Finance
• Subjects: investment management; equity indexation; emerging markets; passive investing; long/short strategies
• Online Access: http://dx.doi.org/10.1080/23322039.2014.890060

Emerging markets equity indexes are usually seen as high return with a high degree of volatility associated with them. However, this should not be the case, if you choose high-quality firms that have increasing returns and lower volatility. The intent of this paper is to introduce the risk weighted alpha (RWA) indexation method that helps identify stocks that have stable increasing returns with lower volatility. In order to review this method in the context of emerging markets scenario, this paper takes the example of the Sensex index listed on the Bombay Stock Exchange (BSE) that comprises India’s top 30 stocks by market capitalisation. Results show that some stocks like Hindustan Lever do show increasing returns and lower volatility. The RWA Sensex index outperforms the BSE Sensex index, while still maintaining a beta that is the same as that in the BSE Sensex index.