The low volatility factor captures excess returns on stocks with volatility, beta or idiosyncratic risk below average. Stocks with a larger market capitalization tend to have lower volatility so that the traditional size factor is often combined with the more recent volatility factor.

The low volatility anomaly is an empirical puzzle that is at odds with basic principles of finance. The Capital Asset Pricing Model (CAPM) and other asset pricing models assert that higher risk should earn higher returns, but in numerous markets and over extended periods, the opposite has been true with less risky assets outperforming their riskier peers.