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What is the zero-beta portfolio’

The zero beta portfolio is the portfolio formation have no systemic risk or, in other words, a beta of zero. Zero-beta portfolio will have the same expected return as the risk-free rate. This portfolio will have zero correlation with market movements because its expected return equals the risk-free rate or a relatively low yield compared to the high beta-ratio portfolios.

Breaking down the ‘zero-beta portfolio’

The zero beta portfolio is unlikely to attract investor interest in bull markets, since such a portfolio has no market exposure and therefore will Underperform a diversified market portfolio. It may attract some interest during the bear market, but investors will likely question whether simply to invest in risk free short-term Treasury bonds is better and cheaper than zero cost portfolio.

Beta and Formula

Beta measures the sensitivity of stock (or other security) on the price movement of a specific reference to the market index. This statistic measures if the investment is more or less volatile than the market index it is measured against. A beta of more than one means that investment is more volatile than the market and beta less than one indicates that investment is less volatile than the market. Negative betas may indicate that the investment moves in the opposite direction than the specific market measure.

For example, imagine a large market capitalization. It is possible that this action may have a beta of 0.97 against “standard & PUR” (s&P) 500 index (large cap stock index), and beta at 0.7 in relation to the Russell 2000 index (a small capitalization stock index). At the same time, perhaps the company would have a negative beta very unrelated index, such as index of emerging markets debt.

The formula for beta:

Beta = Covariance of return market return / variance of market returns

A Simple Zero-Beta Example

As a simple example, a zero beta portfolio, consider the following. A portfolio Manager wants to construct a zero beta portfolio relative to the s&P 500. The Manager $ 5 million to invest and is considering the following investment decisions:

Action 1: there is a beta version 0.95 from

Stock 2 has a beta 0.55

Link 1: beta version 0.2

Bond 2 has a beta of -0.5

Product 1: has beta–0.8

If the investment Manager has allocated capital in the following way, he wanted to create a portfolio with a beta of approximately zero:

Action 1: 700,000 $(14% of the portfolio-weighted beta 0.133)

Promotion 2: $1,400,000 (28% of the portfolio-weighted beta 0.182)

Link 1: $400,000 (8% of the portfolio-weighted beta 0.016)

Bond 2: $1 million (20% of portfolio weighted beta–0.1)

Product 1: $1.5 million (20% of portfolio weighted beta–0.24)

This portfolio will have a beta -0.009, which is almost zero beta portfolio.