Zero-Investment Portfolio

Posted in Finance, Accounting and Economics Terms, Total Reads: 630
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Definition: Zero-Investment Portfolio

A portfolio of assets formed where the group of investments collectively form a zero net value. Such an investment portfolios can be achieved by simultaneously purchasing securities and selling equivalent securities resulting to a net zero. This will definitely have lower risk as well as gains compared to only purchasing or selling the same securities in the portfolio.


Example:

• If a person bought one share of ABC Company whose current market price is Rs 100. In this situation that person is fully exposed to the risk of change in value of that stock. If, however, he sold the same stock i.e. took a short position in the same stock, then any movement up or down would be cancelled out and thus he is saved from any risk by changes in the prices of the stock. Such a combination of these two positions forms a zero-investment portfolio.


Advantages:

• Reduction in taxes, because they generate little or no interest income.

• Reduced risk by protecting against unexpected shifts compared to regular portfolios affected adversely with price movements in the value of the held securities.

• Protecting the overall value of the portfolio when the markets are moving down so that investment can be made at a later date when investor finds proper valuation.

• Determining whether the average portfolio returns are statistically different from zero


Disadvantages:

• As the risk is reduced, even the returns are reduced compared to other portfolios

 

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