Definition zero-beta-portfolio

 

Definition of Zero-Beta Porfolio

A portfolio without any systematic risk is called Zero-beta portfolio. This kind of portfolio is for risk averse investors as its expected return equals the risk free rate of return and is quite low. It has zero correlation with market movements.

 

It does not attract investors when the share prices in the market are rising i.e. bull market. It is also underperform in a diversified market portfolio because of no market exposure. However, in a market in which share prices are falling i.e. bear market, investors are more likely to invest in short-term and risk free treasuries as it is a cheaper alternative of it.

Explanation of Zero-beta Portfolio

One of the types of risk is systematic risk, it measures the sensitivity of a portfolio against market price movements. There is no correlation between zero-beta portfolio and stock market, this means any change in the prices of stock market does not affect the value of zero-beta portfolio. The risk of such portfolio is like that of risk free asset.

Weighted sum of the separate asset betas are used to calculate beta of zero-beta portfolio. Theoretically this kind of portfolio can be created by taking multiple independent assets i.e. the movement in price of one assets has no effect on other assets. A variety of substitute investment products like real estate and future contracts are added in zero-beta portfolio models by hedge fund managers. It can only reduce systematic risk but it cannot minimize the risk associated with particular assets i.e. specific risk.

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