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Zero-Investment Portfolio Definition

What Is a Zero-Investment Portfolio?

A zero-investment portfolio is a hoard of investments that has a net value of zero when the portfolio is assembled, and therefore requires an investor to take no equity gamble in the portfolio. For instance, an investor may short sell $1,000 worth of stocks in one set of companies, and use the proceeds to purchase $1,000 in run-of-the-mill in another set of companies.

Key Takeaways

  • The zero-investment portfolio is a financial portfolio that is composed of securities that cumulatively come to pass in a net value of zero. 
  • A zero-investment portfolio that requires no equity whatsoever is purely theoretical; a truly zero-cost investment plan is not achievable for several reasons.
  • The most important contribution of portfolio theory to our understanding of investments is that a group of staples can earn investors a better risk-adjusted return than individual investments can; however, diversification of assets cannot exterminate risk completely.

Understanding a Zero-Investment Portfolio

A zero-investment portfolio that requires no equity whatsoever is purely debatable; it doesn’t exist in the real world, but conceptually this type of portfolio is of interest to academics studying finance. A absolutely zero-cost investment strategy is not achievable for several reasons. First, when an investor borrows stock from a stockjobber in order to sell the stock and profit from its decline, they must use much of the proceeds as collateral for the loan. Assign, in the U.S., short selling is regulated by the Securities and Exchange Commission (SEC) such that it may not be possible for investors to maintain the right assess of short investments with long investments. Finally, buying and selling securities requires investors to pay commissions to dealers, which increases costs to an investor; a real-life attempt at a zero-investment portfolio would involve risking one’s own capital

The single nature of a zero-investment portfolio leads it to not have a portfolio weight at all. A portfolio weight is usually calculated by dividing the dollar amount that a portfolio is extended by the total value of all the investments in the portfolio. Because the net value of a zero-investment portfolio is zero, the denominator in the equation is zero. Hence, the equation cannot be solved. 

Portfolio theory is one of the most important areas of study for students and practitioners of finance and devoting. The most important contribution of portfolio theory to our understanding of investments is that a group of stocks can earn investors a speculator risk-adjusted return than individual investments can. In most real-world markets, however, diversification of assets cannot rub out risk completely. An investment portfolio that can guarantee a return without any risk is known as an arbitrage opportunity, and unrealistic financial theory usually assumes that such scenarios are not possible in the real world. A true zero-investment portfolio discretion be considered an arbitrage opportunity—if the rate of return this portfolio earns equals or exceeds the riskless rate of requital (usually assumed to be the rate one can earn from U.S. government bonds).

Arbitrage is the process of buying certain amounts of assurances in one market while simultaneously selling the same amount of the same or similar securities in another market. The principle of arbitrage can also be go after to buying and selling securities of like value in the same market. The goal of an arbitrage strategy is to minimize the overall risk of misplacing money, while at the same time taking advantage of opportunities to make money.

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