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.