Is zero beta risk-free?

A zero-beta portfolio is a portfolio constructed to have zero systematic risk, or in other words, a beta of zero. A zero-beta portfolio would have the same expected return as the risk-free rate.

What does a 0 beta mean?

Beta of 0: Basically, cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (given no inflation). Beta between 0 and 1: Companies that are less volatile than the market have a beta of less than 1 but more than 0.

What is the risk premium of a zero beta stock?

The risk premium of a zero beta stock is zero. If you substitute a zero beta stock with a risk free asset the expected return of the portfolio will remain the same but the volatility will go up.

What does it mean if βi is equal to zero?

What does it mean if βi is equal to zero? It means that actual return = expected return + εi. It means the ith stock's returns are not affected by the factor, F. If βi is negative: positive changes in the factor will decrease the ith stock's returns.

How can a risky asset have a beta zero?

Expert Answer. The beta can be zero for a risky asset if the risky asset has firm-specific risk and also its return is not correlated with the market.

Understanding Portfolio Beta - Risk Management

What are assets with 0 beta?

An investment which doesn't correlate with an index or market results and is designed to have zero systemic risk. A zero-beta asset, or an entire portfolio that has been constructed this way, would have the exact same expected return as the risk-free rate.

What does a beta of zero mean in CAPM?

Zero beta model indicates that a risk free interest rate is not necessary in order for CAPM to be valid. Investors keep different risky portfolios; however all such portfolios take place on the efficient frontier.

When beta is zero What is the volatility of the security related to the market?

A beta value between zero to one means that the stock is less volatile than the market. The risk factor would be lower in a portfolio with low beta stock as compared to a portfolio without such stocks.

Does zero equal zero mean infinite solutions?

If you solve this your answer would be 0=0 this means the problem has an infinite number of solutions. For an answer to have no solution both answers would not equal each other.

Does beta measure total risk?

Beta allows for a good comparison between an individual stock and a market-tracking index fund, but it doesn't offer a complete portrait of a stock's risk. Instead, it's a look at its level of volatility, and it's important to note that volatility can be good and bad.

What are the pros of zero-beta portfolio?

Investors with a very low-risk tolerance need to minimize investment risks as much as possible. The Zero-Beta Portfolio is created in such a way that has no systematic risk. The expected returns are low and typically match the risk-free rate of returns.

What is the least risky beta?

Beta Value Less Than One

A beta value that is less than 1.0 means that the security is theoretically less volatile than the market. Including this stock in a portfolio makes it less risky than the same portfolio without the stock.

Are low beta stocks less risky?

If a stock moves less than the market, the stock's beta is less than 1.0. High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.

What is the difference between beta 0 and beta?

Beta-0 thalassemia refers to the absence of production of beta globin. When patients are homozygous for a beta0 thalassemia gene, they cannot make any normal beta chains (hemoglobin A). Beta + thalassemia indicates a mutation that presents decreased but not absent production of beta globin.

What is an example of 0 beta?

A beta of 0 means that the asset is not responsive to a change in market risk. Its value would remain the same. Cash would have a beta of 0.

What is the difference between beta 0 and beta 1?

Regression describes the relationship between independent variable ( x ) and dependent variable ( y ) , Beta zero ( intercept ) refer to a value of Y when X=0 , while Beta one ( regression coefficient , also we call it the slope ) refer to the change in variable Y when the variable X change one unit.

Is zero a form of infinity?

The concept of zero and that of infinity are linked, but, obviously, zero is not infinity. Rather, if we have N / Z, with any positive N, the quotient grows without limit as Z approaches 0.

Can zero and infinity be same?

In terms of logarithms, the original value 0 corresponds to −∞, while the original infinite value corresponds to +∞. When we treat both possible values −∞ and +∞ as a single infinity, we thus treat the original values 0 and infinity as similar.

What does it mean when the solution is zero?

From the above examples, we can see thatthe variable x disappears / gets eliminated& hence we say that the linear equation will have Zero or no solution if it can't be satisfied by any value of the variable or there does not exist any value of the variable which makes the given equation a true statement.

When the beta of a security equals zero How is it related to the risk-free rate?

A security or a portfolio with a value of beta equal to zero has its expected return the same as the risk-free rate of return.

Why is beta not unsystematic risk?

Unsystematic risk refers to the risks inherent in a specific company or an industry. It can potentially be avoided through diversification. Beta measures systematic risk only and not unsystematic risk. For example, positive macro events such as economic booms are likely to result in greater gains for all companies.

Why beta or volatility is not a good measure of risk?

The underlying reason that beta is ineffective as an indicator of risk, or the potential for long-term loss of capital, is that beta is simply a measure of share price volatility. The true risk associated with a company is a result of its business fundamentals.

Can beta be zero in CAPM?

Relaxing some of the assumptions of the CAPM, Black (1972) proposed the zero-beta CAPM. This more general form of the CAPM adds a new zero-beta portfolio factor that is uncorrelated with the market factor.

Does the CAPM predicts that a security with a beta of 0 will offer a zero expected excess return?

The capital asset pricing model predicts that a security with a beta of zero will provide an expected return of zero. False. If beta = 0, then the asset's expected return should equal the risk-free rate, not zero.

How do you calculate risk-free rate?

The so-called "real" risk-free rate can be calculated by subtracting the current inflation rate from the yield of the Treasury bond matching your investment duration.