A Low-Risk vs. Market-Based Portfolio in Equity Market: Evidence from Global Financial Crisis and Global Pandemic Crisis in Pakistan

The study tests the characteristics of a low-risk-based portfolio compared with a broader market-capitalization weighted portfolio (benchmark portfolio) in Pakistan Stock Exchange (PSX). This study considers all listed stocks at PSX as an investment universe. Low-risk stocks were assessed by measuring the idiosyncratic risk. Extensive back-tests were performed to compare the financial performance for 2005-2022. Results show that the market-capitalization-based portfolio outperforms the low-risk-based portfolio in terms of annualized returns. However, the latter significantly reduces the risk and leads to superior risk-adjusted performance. The low-risk portfolio indicates resilience to market turmoil and reduces the downside risk of the market portfolio. The risk-return relationship appears to be stronger in the case of idiosyncrasies. The effect of the GFC-2008 and the GPC-2020 are also investigated; the results indicate that a low-risk-based portfolio carries higher returns while the market capitalization portfolio carries relatively higher risk. Both individuals and institutional investors can enhance the risk-adjusted performance of their portfolios by adopting a low-risk-based strategy.