Zero Beta portfolio having, trouble, someone

suxiaoxiao

I am having trouble understanding the concept of 'zero beta portfolio'. Can someone help?

Londonrocks

Any portfolio that does not have systematic risk or beta =0. Put it another way, does not vary with market portfolio.
E.g., bank deposit, CD,..
Mind you, the portfolio can still have non-systematic risk, e.g., market neutral hedge fund which both go long and short closely-related stocks can have zero beta, but still has a lot of non-systematic risks.

sgupta0827

So how does that translate into high intercept on the y axis and flatter slope for the SML?

studyn

The intercept at the Y axis is the zero beta on the X axis. That's the risk free rate with zero systemic risk. Anything further out to the right has positive beta and some systemic risk.

- Robert

smartpants

I think it is assumed that the zero-beta portfolio has a higher expected return than the risk-free asset. Because the expected return is higher, that shifts the y-intercept higher.

johnnyBuz

What would be an example of a zero beta asset with a return > RF?

- Robert

JoeyDVivre

Yes u did, page 269 in the CFA book sir!

agulani

Ok on that page in the CFA book it says that we assume the zero beta asset to have a higher return than the RF asset, which makes that intercept higher, and the line flatter.

chetan86

Well, still have not found the text (a bit slow today :-)), but what you quote does not contradict what I mentioned.
IF we assume zero beta asset to have a higher return (does not have to be, if you put your money under the mattress, its real return is below zero), then the intercept is higher since the intercept is the return of the zero-beta portfolio. Since the intercept is higher, it makes the line flatter.

dece2011

It has nothing to do with arbitrage in this context. The concept of zero-beta portfolio is a substitute in situations where you don't have a risk free asset to derive at the SML line. E.g., investors in developing countries where gov bonds are as risky as corp bonds, thus no natural risk-free asset. Arbitrage fund can be a substitute for riskfree theoretically, I think, though it is hardly any arbitrage fund is risk-free in its real nature since it is hard to have absolute zero beta (in addition to its nonsystematic risk).

In other context, a zero-beta asset can mean arbitrage fund, long-short fund, whatever assets which do not vary with market portfolio.