A zero-beta portfolio is a portfolio constructed to have zero systematic risk, or in other words, a beta of zero.Such a portfolio would have zero correlation with market movements, given that its expected return equals the risk-free rate or a relatively low rate of return compared to higher-beta portfolios.
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What does a beta between 0 and 1 mean?
A beta between 0 and 1 signifies that it moves in the same direction as the market, but with less volatility—that is, smaller percentage changes—than the market as a whole. A beta of 1 indicates that the portfolio will move in the same direction, have the same volatility and is sensitive to systematic risk.
Can a risky asset have a beta of zero?
Yes. It is possible, in theory, to construct a zero beta portfolio of risky assets whose return would be equal to the risk-free rate. It is also possible to have a negative beta; the return would be less than the risk-free rate.
Does a zero beta stock have zero volatility?
part of the answer is that a zero-beta stock must be negatively correlated with other stocks in the portfolio. So having a zero beta stock can decrease the volatility.
What would be the expected rate of return on a stock with β 0?
β = 0 means the stock has no systematic risk. Hence, the portfolio’s expected rate of return is the risk-free rate, 4%. Because the expected return exceeds the fair return, the stock must be under- priced.
Is Low beta good or bad?
What Is Beta? Beta is a measure of a stock’s volatility in relation to the overall market.High-beta stocks are supposed to be riskier but provide higher return potential; low-beta stocks pose less risk but also lower returns.
What does it mean when beta is low?
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. For example, utility stocks often have low betas because they tend to move more slowly than market averages.
What type of asset has a beta of 0?
Any investment that does not correlate with an index such as the DJIA or overall market results is a zero-beta asset.
What happens if beta is negative?
A negative beta correlation means an investment moves in the opposite direction from the stock market. When the market rises, a negative-beta investment generally falls. When the market falls, the negative-beta investment will tend to rise.
What does a beta of less than 1 mean?
A beta of 1 indicates that the security’s price tends to move with the market. A beta greater than 1 indicates that the security’s price tends to be more volatile than the market. A beta of less than 1 means it tends to be less volatile than the market.
Why is debt beta zero?
The beta of debt βD equals zero. This is the case if debt capital has negligible risk that interest and principal payments will not be made when owed. The timely interest payments imply that tax deductions on the interest expense will also be realized—in the period in which the interest is paid.
What is a zero variance portfolio?
If your portfolio never changes, you have 0 variance. If correlation was -. 99 and stock A went up 1 dollar, stock B would go down only 99 cents, leaving a change of 1 cent or a 1% variance.
Which is the beta for a treasury stock?
zero
Treasury bill is often considered a risk-free asset, because it is of short maturity, highly liquid and virtually free of default risk. Therefore, the beta of the treasury bills is zero.
Are the following true or false stocks with a beta of zero offer an expected rate of return of zero?
Stocks with a beta of zero offer an expected rate of return of zero. False. β = 0 implies E(r) = rf , not zero.The CAPM implies that investors require a higher return to hold highly volatile securities.
How can the beta of a portfolio be reduced?
If the beta is below one, the stock is less volatile than the overall market and a beta above one indicates that the stock will react more severely. The best way to reduce the volatility in your trading portfolio is to sell high beta stocks and replace them with lower beta names.
What is the beta for a portfolio with an expected return of 12.5 %?
What is the beta for a portfolio with an expected return of 12.5%? Since rf = 5% and E(rM) = 10%, from the CAPM we know that 12.5% = 5% + beta(10% – 5%), and therefore beta = 1.5.
What does a beta of 0.4 mean?
For a fund with a beta of 0.4, if the market rises 1%, the fund will rise on average, 0.4%. The relationship is the same in a falling market. (Please note that funds can have a negative beta, meaning that on average they rise when the market falls and vice versa).”
What does a beta of 0.6 mean?
Teva Pharmaceutical Industry’s 2.49 beta, for example, indicates that the stock is expected to be more than twice as volatile than the market, while Intel’s beta of 0.6 means the stock will typically move at a rate that’s only about half that the broader market (data from Yahoo Finance, June 13, 2019).
What does a beta of 2.5 mean?
Beta, also known as the beta coefficient, measures how the expected return of a stock is correlated to the performance of the stock market as a whole.A positive beta, such as a one or two, means that the stock usually tracks the market in general.
What does a beta of 0.2 mean?
A beta of one means the stock or industry tracks the market’s movement. If beta is less than one, the stock or industry has less volatility than the market. If it’s more than one, it has more volatility than the market.If your industry has a beta of 0.2, it is only 20% as risky as the index.
What does a .5 beta mean?
And there are three possible categories a stock can be in, based on its beta. A stock with a beta less than one tends to be less volatile than the overall index. For example, a beta of 0.5 implies that a stock’s movements will theoretically be about 50% of the index’s movements.