in my portfolio management stusies i have come across this zero beta prtfolio idea. on the CML anything to the left is known as a lending portfolio, whereas the risky assets mixed with risk free assets will provide an optimal portfolio on the CML. those to the right are borrowing portfolios. where risky assets are mixed with borrowing at the risk free rate. it is said that since most can not borrow at this rate as zero beta portfolio is used to supplement this. can anyone give me an example of this zero beta portfolio? I have never heard of it.
A zero beta portfolio is just a portfolio uncorrelated to the market portfolio. A long/short equity portfolio, managed futures, comic books, art, funding a bail bondsman are all arguably zero beta portfolios.
If Beta is zero, then the expexted rate of return should equal risk free return. But for non collectible comic books, the expected rate of return should be negative. Thus a comic book is not a zero beta portfolio. Yet comic book is apparently not correlated with market. Where am I wrong?
Non-collectible comic books have beta of 0 and no return at all. I was talking about collectible comic books, which I really don’t know anything about except that it’s hard to believe they are correlated with stocks.
JoeyDVivre Wrote: ------------------------------------------------------- > Non-collectible comic books have beta of 0 and no > return at all. I was talking about collectible > comic books, which I really don’t know anything > about except that it’s hard to believe they are > correlated with stocks. I just have to believe that there’s some sort of cointegration between prices of stock and comic books. 1. If the economy tanks wouldn’t you expect pressure on disposable income, the type used for investments & saving (purely financial or otherwise?) 2. If income levels rise wouldn’t you expect to see increases in all luxury asset prices? 3. At a bare minimum: I think typical beta calculations use nominal prices, which have a trend (inflation), and so will exhibit a bit of spurious correlation. So anything you buy with currency will exhibit a minimal positive beta.
That’s probably right and of course a complete version of CAPM would include comic books in the market portfolio I guess.
According to DarienHacker, wouldn’t that mean that everything is in some way or another correlated to stocks? What now happens to the zero-beta portfolio? sigh…
I’ll bet DarienHacker would say that being long any risky asset or asset that is affected by inflation is correlated with stocks (I’ll let him speak for himself, of course).
this is a good argument (in my opinion) for how a long/short position can create a zero beta portfolio (sorry for the long link). pgs 5-7 http://books.google.com/books?id=FTFuPFx0hdcC&pg=PA6&lpg=PA6&dq="zero+beta"+portfolio+example&source=web&ots=cej8eXZ5YI&sig=7YRVS-lF_3tQCEV6-7KP_q3SIjo#PPA6,M1
It’s pretty easy to create a zero beta portfolio with pairs trading. Just make the beta of the long portfolio equal the beta of the short portfolio.
but harder to maintain…
Not hard to maintain - hard to make money
-er, due to variability of beta over time, and interactions of correlations of stocks in the portfolio. Whether it is hard in absolute terms is a matter of debate (but not a very interesting one).
Back to inflation as a source of cointegration. I pulled out Excel for a quickie. My setup: + 10 years of quarterly returns + real return on comic books and stocks is rand()/20-.02 each period (slight real growth) + inflation is rand()/100 each period (between 0% and 4% per year) + 1,000 trials Pretty consistently the correl() of real returns averages 0.0, and the correlation of nominal returns averages 0.036. So I’d say that even in a low inflation environment there’s an upward bias on correlation of otherwise unrelated series. (I’ve honestly forgotten how to calculate beta – sorry.) I’d expect some of the other macro-econ figures I mentioned (GDP, disposable income) to produce a greater effect than this. So by itself I don’t think inflation is a very important factor (in low-inflation regimes), but it’s there. I’m not sure whether the market portfolio needs to include van Goghs and early Superman editions, but your correlation studies should be done with stationary series (just like the CFAI curriculum says!)
CAPM is about the world’s investable wealth - I’d include Van Goghs for sure and probably even early Supermans.