In real life, does a zero-beta portfolio exist? With regards to the capital asset pricing model, relaxing assumptions about: A) taxes will reduce differences between the capital market lines of different investors. B) transaction costs will make investors more likely to sell, and less likely to hold. C) risk free borrowing and lending rates results in a lower intercept and steeper slope. D) homogeneous expectations will result in the SML appearing more as a band instead of a line.
I’m going with D.
D
D
ddD
a?
You guys are right. Below is the answer. I was having trouble understanding how is a zero-beta portfolio possible, but I just realized there are a lot of negative beta stocks that could be purchased to make it happen. Taxes change investors’ return expectations. Considering different marginal tax rates will result in a vast array of different after-tax requirements, leading to a vast array of CMLs and SMLs for different investors. The assumption of no transaction costs allows investors to make a profit even if a stock is just slightly off the SML. Add transaction costs into the mix, and investors will not sell stocks close to the SML unless the profit exceeds the transaction costs. As such, investors will be more likely to hold, rather than sell, because stocks that could be sold for a profit under the pure CAPM cannot be sold for a profit after transaction costs. If risk-free borrowing and lending does not exist, then a portfolio of risky securities must be created such that the portfolio beta equals zero. The zero-beta portfolio is similar to the risk-free asset in that both have zero betas, but they differ in that the zero-beta portfolio has a non-zero standard deviation. The expected return on the zero-beta portfolio exceeds the risk-free rate therefore the SML will now have a higher intercept and a flatter slope.
I missed reading REDUCE making too many mistakes like that
Shorting–> negative beta
Thanks dimes. Didn’t know that shorting provides for negative beta. Can you expand on this? tx,
Beta reflects covariance with the market, obviously if you short the market portfolio, the value of that shorted position will move exactly opposite to the market.
Got it. Thanks BS
Zero B is not in it this year guys.