Low Risk, High Variability: Practical Guide for Portfolio Construction

The article examines how various portfolio construction choices influence the performance of low-risk strategies, and shows that methodological decisions critically influence portfolio outcomes, causing substantial dispersion in performance metrics across weighting schemes and risk estimators. Constraints such as short-sale restrictions and size or price filters reduce this variation only marginally. Volatility-based risk estimators yield the most favorable results, outperforming beta-based approaches. A further finding is that transaction costs significantly affect performance rankings, underscoring the need to evaluate strategies under realistic implementation assumptions. The article provides practical guidance for investors seeking to build more reliable low-risk portfolios and to limit nonstandard errors in portfolio design.