What is a 'ZeroBeta Portfolio'
A zerobeta portfolio is a portfolio constructed to have zero systematic risk or, in other words, a beta of zero. A zerobeta portfolio would have the same expected return as the riskfree rate. Such a portfolio would have zero correlation with market movements, given that its expected return equals the riskfree rate or a relatively low rate of return compared to higherbeta portfolios.
BREAKING DOWN 'ZeroBeta Portfolio'
A zerobeta portfolio is quite unlikely to attract investor interest in bull markets, since such a portfolio has no market exposure and would therefore underperform a diversified market portfolio. It may attract some interest during a bear market, but investors are likely to question whether merely investing in riskfree, shortterm treasuries is a better and cheaper alternative to a zerocost portfolio.Beta and Formula
Beta measures a stock's (or other security's) sensitivity to a price movement of a specifically referenced market index. This statistic measures if the investment is more or less volatile compared to the market index it is being measured against. A beta of more than one indicates that the investment is more volatile than the market, while a beta less than one indicates the investment is less volatile than the market. Negative betas are possible, and indicate that the investment moves in an opposite direction than the particular market measure.
For example, imagine a large cap stock. It's possible that this stock could have a beta of 0.97 versus the Standard and Poor's (S&P) 500 index (a large cap stock index), while simultaneously having a beta of 0.7 versus the Russell 2000 index (a small cap stock index). At the same time, it could be possible the company would have a negative beta to a very unrelated index, such as an emerging market debt index.
The formula for beta is:
Beta = Covariance of Market Return with Stock Return / Variance of Market Return
A Simple ZeroBeta Example
As a simple example of a zerobeta portfolio, consider the following. A portfolio manager wants to construct a zerobeta portfolio versus the S&P 500 index. The manager has $5 million to invest and is considering the following investment choices:
Stock 1: has a beta of 0.95
Stock 2: has a beta of 0.55
Bond 1: has a beta of 0.2
Bond 2: has a beta of 0.5
Commodity 1: has a beta of 0.8
If the investment manager allocated capital in the following way, he would create a portfolio with a beta of approximately zero:
Stock 1: $700,000 (14% of the portfolio; a weightedbeta of 0.133)
Stock 2: $1,400,000 (28% of the portfolio; a weightedbeta of 0.182)
Bond 1: $400,000 (8% of the portfolio; a weightedbeta of 0.016)
Bond 2: $1million (20% of the portfolio; a weightedbeta of 0.1)
Commodity 1: $1.5 million (20% of the portfolio; a weightedbeta of 0.24)
This portfolio would have a beta of 0.009, which is considered a nearzero beta portfolio.

Beta
Beta is a measure of the volatility, or systematic risk, of a ... 
International Beta
Better known as "global beta", international beta is a measure ... 
High Beta Index
An index composed of companies with high betas trading on the ... 
Unlevered Beta
A type of metric that compares the risk of an unlevered company ... 
Portable Alpha
A strategy in which portfolio managers separate alpha from beta ... 
Smart Beta ETF
Smart Beta ETF is a type of exchangetraded fund that uses alternative ...

Trading
Understanding Beta
Beta is a measure of volatility. Find out what this means and how it affects your portfolio. 
Markets
High Beta â€“ Low Beta Stocks Define Volatility Trades
We compare the Beta values obtained from financial sources. Also, how to compute Beta using Excel. 
Managing Wealth
Beta: Know The Risk
Beta says something about price risk, but how much does it say about fundamental risk factors? Find out here. 
Managing Wealth
How AQR Places Bets Against Beta
Learn how the bet against beta strategy is used by a large hedge fund to profit from a pricing anomaly in the stock market caused by high stock prices. 
Markets
3 Cases When Beta Does Not Measure Volatility of Stocks
Examine the theoretical and statistical relationship between beta and volatility to identify three factors that limit beta's explanatory value. 
Trading
Avoid Future Shock By Protecting Your Portfolio With Futures
Worried about protecting your portfolio of diversified stocks and assets? Using futures with correct strategies can help. 
Managing Wealth
How To Calculate Beta Of A Private Company
We explain two methods for calculating the beta of a private company. 
Trading
Bettering Your Portfolio With Alpha And Beta
Increase your returns by creating the right balance of both these risk measures. 
Investing
The Capital Asset Pricing Model: An Overview
CAPM helps you determine what return you deserve for putting your money at risk. 
Financial Advisor
How to Explain Smart Beta Strategies to Clients
Smart beta funds continue to gain steam. Here's how to explain the benefits of these strategies to clients.

How does beta measure a stock's market risk?
Learn how beta is used to measure risk versus the stock market, and understand how it is calculated and used in the capital ... Read Answer >> 
What kinds of securities are influenced most by systematic risk?
Learn what systematic risk is, how investors can measure it with beta and how securities with a beta greater than 1 are most ... Read Answer >> 
How does my insurance company determine what premiums I have to pay for coverage?
Learn about some of the quantitative finance measures that investors without a strong math background can use in analyzing ... Read Answer >> 
How do I use smart beta funds to create a diversified portfolio?
Learn how smart beta funds may give greater diversification than passively tracking stock indexes and make active management ... Read Answer >> 
What is the best way to diversify an investment portfolio?
Learn which methods investors use to diversify their portfolios and how risk tolerance plays a big role in determining the ... Read Answer >> 
What is the formula for calculating beta?
Find out more about beta, what a stock's or portfolio's beta measures, and learn how to calculate a security's or portfolio's ... Read Answer >>