This study documents a novel finding that fundamental volatility measured from financial statement variables negatively predicts stock returns, an effect that is strikingly pervasive (over a large number of accounting variables) and persistent (predicting returns over at least two years). A long-short portfolio based on fundamental volatility generates a significantly positive monthly return of 0.93% and significant alphas under a variety of factor models including the Fama-French five-factor model and the q-factor model. We propose a production-based asset pricing explanation to this high-volatility/low-return phenomenon. In the model, due to diminishing marginal return to inputs, firms with higher operating volatility have lower expected profitability and lower expected returns. Further empirical analyses confirm two key predictions of the model. First, the effect of fundamental volatility on stock return is mainly through the profitability channel. Second, the negative effect of fundamental volatility on both profitability and return is stronger for firms facing more severe diminishing marginal returns in their operations.