Does an increase in portfolio volatility create more returns? Evidence from India


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The classical view of experts associates greater risks with greater rewards. The present study explores whether increased volatility in portfolios can create more returns for investors by using technical indicators or the buy-and-hold (BH) strategy. The study used closing prices of National Stock Exchange (NSE) 500 index firms for a period of 16 years (2007–2022). Five portfolios ranging from low to high volatility were created using standard deviation as a key measure. Findings indicate that as the volatility of the portfolios increases, the moving average (MA) returns seem to be higher. Across the various MA time frames, the 20-day MA seems to have generated the highest return annually (36.53% before transaction costs and 31.05% after transaction costs) due to reasonable trading opportunities with adjustable transaction costs. The CAPM also generated positive alpha (after bearing transaction costs) in the case of 20, 50, and 100 days MA, with the values being 16.66%, 13.29%, and 12.09%, respectively, in the case of highly volatile portfolios. On the other hand, while the BH strategy created substantial returns in all scenarios, the risk factor was extremely high due to the high standard deviation. Hence, it is suggested that investors/traders consider the BH strategy more cautiously while choosing between technical analysis returns and BH returns. Investors with high-risk preferences may have BH as their choice, while day traders with managed risk appetites may prefer technical tools over BH returns.

The infrastructural support provided by the FORE School of Management, New Delhi in completing this paper is gratefully acknowledged.

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    • Figure 1. Portfolio average returns without adjusting transaction costs
    • Figure 2. Portfolio average returns after adjusting transaction costs
    • Table 1. Portfolio returns (without transaction costs)
    • Table 2. Portfolio returns (after transaction costs)
    • Table 3. Portfolio returns during the 2007–2008 recession
    • Table 4. Portfolio returns during COVID-19 (2020–2021)
    • Table 5. CAPM-based alpha and beta values (without TC adjustment)
    • Table 6. CAPM-based alpha and beta values (after TC adjustment)
    • Conceptualization
      Vandana Bhama
    • Data curation
      Vandana Bhama
    • Formal Analysis
      Vandana Bhama
    • Methodology
      Vandana Bhama
    • Software
      Vandana Bhama
    • Validation
      Vandana Bhama
    • Visualization
      Vandana Bhama
    • Writing – original draft
      Vandana Bhama
    • Writing – review & editing
      Vandana Bhama