High Expectations Usually Disappoint

High expectations, on average, lead to negative surprises and low expectations , on average, can lead to positive surprises. We know this intuitively from our past experiences. And it seems to me that in the stock market this must only be more true. After all, the noise generated by media and financial "pundits" usually leads to a lot of hype. Dot.com experience is still fresh in memory.

I wanted to see if this can be verified quantitatively.

I took SPHB and SPLV as the two examples of high expectations and low expectations basket of stocks. I went to fund performance under fund tab on ETFscale.
What are these ETFs ? SPHB is S&P 500 high beta ETF and SPLV is S&P 500 low volatility ETF. Finance theory tells us that more systematic risk on average should be rewarded by more return. So we should expect SPHB to do better than SPY (plain vanilla S&P 500) and SPLV (S&P 500 low volatility stocks).

Fund Performance Measures From 2011-06-01

Statistics SPHB SPY SPLV
Annual average return 12.96% 14.76% 14.4%
Cumulative return 49.39% 69.23% 68.41%
Annual Volatility 21.17% 11.85% 8.94%
Sharpe Ratio (Return per unit of risk) 61.22% 124.56% 161.07%



As you can see from the table above risk adjusted return, also known as Sharpe Ratio by finance geeks, was highest in SPLV (SP500 low volatility ETF). In the time period used for analysis, high beta stocks ended up giving us a lot of risk (as measured by standard deviation), without getting the return commensurate with that increased risk. On the other hand even after having comparatively much less risk in SPLV, I ended up pretty close to getting the cumulative returns of SPY: 69.23 % vs 68.41 %.