1
$\begingroup$

I read in E. Quian's "Quantitative Equitity Portoflio Management" the following:

A traditional long-only portfolio [with unit beta] would have most of its risk in the market risk. However, a zero beta portfolio, typically a long-short market-neutral portfolio, would have no systematic risk.

Why are Beta=1 portfolios typically long-only and why are Beta=0 portfolios typically long-short and market neutral?

$\endgroup$
2
$\begingroup$

Portfolio beta is a linear combination of each asset's beta times the weight of the asset in the portfolio. Thus in general we have $$ \beta = \sum_{i=1}^N w_i \beta_i $$ where $w_i$ is the weight of asset $i$ and $\beta_i$ its beta. If we assume that for stocks the betas are positive then $\beta$ above is positive for positive weights. If you have positive and negative weights then you can get $\beta=0$.

If you have a 130/30 portfolio - thus positive weights that sum to 130% and negative ones that sum to -30% then you can have a beta of approx 1.

Note that for mutual funds and individual investors it is not that easy to have short exposure to single stocks.

$\endgroup$
5
  • $\begingroup$ Thanks @Richard this is helpful, but I am having a hard time relating your answer to my question. Let me know if there is anything I can do to clarify it. $\endgroup$ – Josh May 29 '16 at 15:25
  • $\begingroup$ Is is because the more positive Beta is, the more long the portfolio is? $\endgroup$ – Josh May 29 '16 at 15:27
  • $\begingroup$ How do you measure beta? Ex-post it has something to with the performance of the assets that you hold, right? In a first approximation (which is also true ex-ante) the beta is what my formula above says. If you are long then you are long the market - an indication by how much is given by beta. What is your understanding of beta? $\endgroup$ – Ric May 29 '16 at 17:52
  • $\begingroup$ The beta of a typical stock is 1.0. What is the lowest beta stock that you know of? The lowest I know is Hawaii Electric (HE) with beta 0.4. I suppose with some effort I could find some a little lower than that. How are you going to combine together stocks with Beta of 0.4 or 0.3 into a portfolio with a beta of zero? You can't do it unless you short some stocks... $\endgroup$ – Alex C May 30 '16 at 1:38
  • $\begingroup$ Yes, of course... This is what my answer says... $\endgroup$ – Ric May 30 '16 at 4:44

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.