Betting against sentiment? Seemingly unrelated anomalies and the low‐risk effect

The negative CAPM alphas of high-beta and high-variance stocks are attributable to an unaccounted factor in the CAPM. We use eight seemingly unrelated anomalies construct a composite spirit optimal orthogonal portfolio (FOP). Accounting for FOP re-establishes positive relation between beta average returns time series regressions as well cross-sectional explains stocks. To analyze economic drivers behind FOP, we perform horse race leverage constraints, investor sentiment, disagreement. Our results highlight sentiment most promising explanation low-risk effect.