I didn't say "low risk, high returns." It is a spectrum. What you've said in your first two sentences sounds fine as a textbook principle. But the real world is messier and opportunities don't just vanish: if you do the math on a basic risk parity strategy with the S&P and some uncorrelated ETF, you can see it will beat the market on a risk adjusted basis. Very often you can then leverage this up to a higher absolute return than SPY while keeping lower volatility and beta overall.
> There is no unexploited profit opportunity that is risk free
This is essentially encapsulated by a Sharpe ratio (among other things). On the contrary, it is not especially difficult to produce a relatively high Sharpe ratio, accounting for transaction and margin costs, if you don't have a large amount of money to invest (large means single digit billions or more). This is especially, but not exclusively, the case if you don't care to compound your returns.
> But the real world is messier and opportunities don't just vanish: if you do the math on a basic risk parity strategy with the S&P and some uncorrelated ETF, you can see it will beat the market on a risk adjusted basis.
Sure, there are asymmetries in real life and information takes a while to dissipate to all agents, but unless you're a robo-trader doing high frequency temporal arbitrage, I don't buy for a second that you can beat the market on a continuous basis. You might think you do, but that would be just some hot-hand fallacy.
> This is essentially encapsulated by a Sharpe ratio (among other things).
You're conflating two things. Sharpe ratio is about a profit opportunity with regards to its well established degree of risk. Unexploited opportunity is when you asymmetrically discover a new return opportunity upon what was already priced.
In both cases it comes down to the belief that "I am smarter than other investors, and can profit from an angle they haven't thought". I will not assert a strong efficient market hypothesis, but in overwhelming majority of the cases, no, you're not.
Like I said, run through a basic risk parity strategy holding SPY and an uncorrelated ETF. Calculate the beta, volatility and return over 10 - 20 years. It does beat the market continuously on a risk adjusted basis. With leverage it also beats on total returns with lower volatility and beta.
Beating the market is not mysterious, it's just difficult to do it by a lot or at scale. Just because well performing portfolios are well known doesn't mean they cease being effective in principle, the way you seem to think would happen. These days a risk parity portfolio isn't enough to solicit funds from savvy investors because it's well known and they won't pay management/performance fees if that's all you're offering. But it's been a staple since Dalio developed it 30 years ago for good reason.
You can find code for running through the kinds of things I'm talking about, as well as more in-depth discussion here: https://qoppac.blogspot.com.
> There is no unexploited profit opportunity that is risk free
This is essentially encapsulated by a Sharpe ratio (among other things). On the contrary, it is not especially difficult to produce a relatively high Sharpe ratio, accounting for transaction and margin costs, if you don't have a large amount of money to invest (large means single digit billions or more). This is especially, but not exclusively, the case if you don't care to compound your returns.