pppokAccounting Rate of Return (ARR): Definition, How to Calculate, and Example
What Is the Accounting Rate of Return (ARR)?The accounting rate of return (ARR) is a formula that reflects the percentage rate of return expected on an investment or asset, compared to the initial investment's cost. The ARR formula divides an asset's average revenue by the company's initial investment to derive the ratio or return that one may expect over the lifetime of an asset or project. ARR does not consider the time value of money or cash flows, which can be an integral p...
pppokCreative Destruction
What Is Creative Destruction?Creative destruction is the dismantling of long-standing practices in order to make way for innovation and is seen as a driving force of capitalism.KEY TAKEAWAYSCreative destruction describes the deliberate dismantling of established processes in order to make way for improved methods of production.Creative destruction is most often used to describe disruptive technologies such as the railroads or, in our own time, the internet.The term was coined in the early 194...
pppokZero-Bound
What Is Zero-Bound?Zero-bound is an expansionary monetary policy tool where a central bank lowers short-term interest rates to zero, if needed, to stimulate the economy. A central bank that is forced to enact this policy must also pursue other, often unconventional, methods of stimulus to resuscitate the economy.KEY TAKEAWAYSZero-bound is an expansionary monetary policy tool where a central bank lowers short-term interest rates to zero, if needed, to stimulate the economy.Central banks will m...
pppokAccounting Rate of Return (ARR): Definition, How to Calculate, and Example
What Is the Accounting Rate of Return (ARR)?The accounting rate of return (ARR) is a formula that reflects the percentage rate of return expected on an investment or asset, compared to the initial investment's cost. The ARR formula divides an asset's average revenue by the company's initial investment to derive the ratio or return that one may expect over the lifetime of an asset or project. ARR does not consider the time value of money or cash flows, which can be an integral p...
pppokCreative Destruction
What Is Creative Destruction?Creative destruction is the dismantling of long-standing practices in order to make way for innovation and is seen as a driving force of capitalism.KEY TAKEAWAYSCreative destruction describes the deliberate dismantling of established processes in order to make way for improved methods of production.Creative destruction is most often used to describe disruptive technologies such as the railroads or, in our own time, the internet.The term was coined in the early 194...
pppokZero-Bound
What Is Zero-Bound?Zero-bound is an expansionary monetary policy tool where a central bank lowers short-term interest rates to zero, if needed, to stimulate the economy. A central bank that is forced to enact this policy must also pursue other, often unconventional, methods of stimulus to resuscitate the economy.KEY TAKEAWAYSZero-bound is an expansionary monetary policy tool where a central bank lowers short-term interest rates to zero, if needed, to stimulate the economy.Central banks will m...
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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. 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.
A zero-beta 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 risk-free, short-term treasuries is a better and cheaper alternative to a zero-cost portfolio.
A zero-beta portfolio is constructed to have zero systematic risk—a beta of zero.
Beta measures an investment's sensitivity to a price movement of a specifically referenced market index.
Zero-beta portfolios have no market exposure so are unlikely to attract investor interest in bull markets, since such portfolios would underperform diversified market portfolios.
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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
As a simple example of a zero-beta portfolio, consider the following. A portfolio manager wants to construct a zero-beta 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 weighted-beta of 0.133)
Stock 2: $1,400,000 (28% of the portfolio; a weighted-beta of 0.154)
Bond 1: $400,000 (8% of the portfolio; a weighted-beta of 0.016)
Bond 2: $1 million (20% of the portfolio; a weighted-beta of -0.1)
Commodity 1: $1.5 million (30% of the portfolio; a weighted-beta of -0.24)
This portfolio would have a beta of -0.037, which would be considered a near-zero beta portfolio.
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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. 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.
A zero-beta 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 risk-free, short-term treasuries is a better and cheaper alternative to a zero-cost portfolio.
A zero-beta portfolio is constructed to have zero systematic risk—a beta of zero.
Beta measures an investment's sensitivity to a price movement of a specifically referenced market index.
Zero-beta portfolios have no market exposure so are unlikely to attract investor interest in bull markets, since such portfolios would underperform diversified market portfolios.
0 seconds of 4 minutes, 0 secondsVolume 75%
4:00
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
As a simple example of a zero-beta portfolio, consider the following. A portfolio manager wants to construct a zero-beta 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 weighted-beta of 0.133)
Stock 2: $1,400,000 (28% of the portfolio; a weighted-beta of 0.154)
Bond 1: $400,000 (8% of the portfolio; a weighted-beta of 0.016)
Bond 2: $1 million (20% of the portfolio; a weighted-beta of -0.1)
Commodity 1: $1.5 million (30% of the portfolio; a weighted-beta of -0.24)
This portfolio would have a beta of -0.037, which would be considered a near-zero beta portfolio.
Learn the Basics of Trading and Investing
Looking to learn more about trading and investing? No matter your learning style, there are more than enough courses to get you started. With Udemy, you’ll be able to choose courses taught by real-world experts and learn at your own pace, with lifetime access on mobile and desktop. You’ll also be able to master the basics of day trading, option spreads, and more. Find out more about Udemy and
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