Zero-Beta Portfolio

  

When you have a portfolio of all kinds of fun security-goodies, you can calculate the “beta,” which is the overall risk your portfolio has (in comparison to the market, or to a set benchmark).

You can tinker with individual eggs in your basket to make your beta more or less risky. As people get closer to retirement, usually you want your beta to get less risky, which means closer to zero. When you’re at a beta of one, your risk is equal to the market, or your benchmark. Above one means you’re living on the edge, taking on more risk for the hope of higher returns.

A zero-beta portfolio is when there’s zero systematic risk, which is when your beta is zero. If you had a portfolio with a beta of zero, you could watch everyone rejoice at bull markets and weep in the corner during bear markets while your portfolio is completely unaffected by any of those market changes. This is good if you’re close to retirement, since that’s not the time to be playing with the potential to lose a lot of money, which you’ll need as your income.

So how is the zero-beta portfolio achieved? You can balance things out by pairing together a mutual fund or ETF with a bond fund that has a negative beta. Don’t forget: a portfolio could include “alternative” securities like real estate and land, which are safe from stock market fluctuations, and futures contracts, which can help an investor hedge bets on the market. Living the zero-beta-portfolio life may be a boring ride, but it’s a green pasture if the rest of the economy turns into a desert.

Related or Semi-related Video

Finance: What is Beta?22 Views

00:00

Finance allah shmoop What is beta it's Volatility That's it

00:07

here's a stock chart reflecting the performance of a highly

00:09

volatile stock plus size manikins ink and here's A teen

00:13

t stock chart The last twenty years Yeah Whole lot

00:16

less volatile Eighteen t stock has left beta then p

00:20

s m so here's p s m mapped over the

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s and p five hundred Gopi sm is about twice

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a cz volatile Is the market here like on days

00:28

The markets up one percent p s m is up

00:31

two percent on days The markets down four percent p

00:33

s m is crushed down eight percent So you'd say

00:36

it has a beta relative to the s and p

00:38

five hundred of two point Oh or two acts So

00:41

the hammer this home let's do advanced math here So

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if any given day the marks up one point two

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percent has bit of two point Oh you'd expect p

00:48

s m to be up two point four percent and

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same deal on the downside Yeah All right So what

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gives a company high beta Well simply put uncertainty Some

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companies have products in the pipeline Where the broader market

01:00

has a lack of certainty that buyers by the millions

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anyway will want that product sort of the opposite of

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coca cola Like what are the odds that buyers will

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still want diet coke next year Yeah pretty good odds

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but plastic manikins modeling extra large kimonos away Less certainty

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So the company may end up awesome and ruling the

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world Or it may end up being melted down for

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spare parts Yeah Making newsman drone helicopter thing right Well

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what else creates beta Well leverage or debt Some companies

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have tons of cash Others have tons of debt of

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company a is trading for one hundred bucks a share

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and it has no debt and ninety five dollars a

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share in cash Will The market is valuing the operations

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of that company and only five bucks a share So

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the operations could do awesome Or they could do terrible

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and nobody's going to care Big web stock goes to

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one hundred hundred five Ninety five Something like that big

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No big deal So yeah i think about that The

01:58

value The operations could increase one hundred percent and be

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worth five dollars more than the company's worth one hundred

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Five bucks No big deal All right but what about

02:06

company b It has one hundred million box in ibadan

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or cash flow or cash earnings and five hundred million

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dollars in debt Well it trade today at eight times

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ebitda calculated as eight times that hundred million figure Then

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subtracting the five hundred million dollars in debt Well the

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company would be valued at three hundred million dollars That

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would be its market cap But what if it's new

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product is likely to be loved and people get excited

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about it and its operation suddenly get valued at twelve

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times even thought instead of just eight While the math

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goes like twelve times than one hundred million in cash

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flow for one point two billion then you subtract the

02:43

five hundred million dollars in debt And that gets you

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a market value for the whole company of seven hundred

02:48

million dollars So think about it The multiple of even

02:50

da being paid by investors went up just fifty percent

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from eight to twelve But the stock market value of

02:56

this company went up well over one hundred per cent

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In fact one hundred thirty three percent Why so much

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More volatile or so much more beta Yeah leveraged debt

03:04

gasoline on the fire It can be great but when

03:08

things go the other way it can leave you feeling 00:03:10.49 --> [endTime] you know like a dummy

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