Does profitability explain the low-risk anomaly in India?

This study investigates the presence of a risk anomaly in the Indian stock market and examines whether profitability can explain this anomaly. Using Nifty 500 index companies from March 2003 to June 2022, the study concludes that: a) the risk anomaly is present in the Indian stock markets and manifests in the form of a lack of a risk-return relationship; b) higher profitability enhances absolute and risk-adjusted performance; c) high-volatility stocks tend to have lower profitability, while low-volatility stocks often exhibit higher profitability; d) the positive risk-return relationship is not restored after controlling for profitability; e) after accounting for profitability, the risk anomaly moderates but still fails to resolve the puzzle. The study is relevant for investors, scholars, and money managers, and it offers insights into the existing debate on the role of profitability in the emerging market context. • A risk anomaly is present in Indian stock markets and manifests in the form of a lack of a risk-return relationship. • Higher profitability enhances absolute and risk-adjusted performance. • High-volatility stocks tend to have lower profitability, while low-volatility stocks often exhibit higher profitability. • The positive risk-return relationship is not restored after controlling for profitability. • After accounting for profitability, the risk anomaly moderates but still fails to resolve the puzzle.