Continuing in my exploration of the Russell 2000 (Russell 2000 Softail Fat Boy), I thought I would try to approach the topic with a low volatility paradox mindset. Since 2005, beta of the Russell 2000 compared to the S&P 500 has exceeded 1.2 with a max of 1.6 for almost every rolling 1 year period. This suggests that the Russell 2000 is anything but low vol.

However, we can take a more simplistic view by comparing the rolling 50-day standard deviation of the Russell 2000 with the S&P 500. Russell 2000 on an absolute and relative basis does very well when rolling 50-day standard deviation of the Russell 2000 minus the same standard deviation on the S&P 500 exceeds –1.25%, so the Russell 2000 performs best when volatility approaches the S&P 500. In low relative volatility environments, it seems we should own the high beta Russell 2000. You will see the largest down moves all occur in the non-shaded time periods.

I intentionally wanted this post to be simple, so I hid a lot of the preliminary work and extra links. Far more went into this than appears above.

R code from GIST:

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