AuthorTopic: A question about zero beta portfolio
Dufo
@2014-07-21 19:29:50
I understand that conceptually, a zero beta portfolio is one that should have no correlation with the market portfolio. What else does one need to know / should one know beyond that with respect to a zero beta portfolio? It seems one can simply substitute that in for the risk free rate in the CAPM equation, but I have a few questions on point (AnalystNotes are not super clear on this one):

1. What does a zero beta portfolio have to do with making an assumption about being able to borrow and lend at the same rates?

2. AN Notes: "As long as the expected return on the zero beta portfolio is assumed to be greater then the risk free lending rate, the resulting security market line will have a smaller risk premium (ie a flatter slope)" Huh?
ccleeren
@2014-08-18 17:20:44
1) Not sure what the context is here

2) The zero beta portfolio can certainly contain risk, just not systematic equity risk. That means it must have a higher expected return than risk-free. That means you could invest your portfolio in some combination of that portfolio and the market. If the return of the zero beta portfolio > rf then the line from that point on the x-axis tangent to the efficient frontier must have a smaller slope than the CML because the arrow enclosed by the efficient frontier is convex (this is a mathematical thing). But if you draw what looks like an efficient frontier and then take a ruler and draw the tangent line from rf to it and a point higher than rf to it, it will be clear that the latter line has lower slope than the former.

CFA Discussion Topic: A question about zero beta portfolio

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