Zero-Investment Portfolio

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Definition: Zero-Investment Portfolio


Zero-Investment Portfolio

Quick Summary of Zero-Investment Portfolio


A portfolio or part of a portfolio with zero (or nearly zero) net value, created by buying and shorting equal amounts of securities, usually for arbitrage reasons.




What is the dictionary definition of Zero-Investment Portfolio?

Dictionary Definition


A portfolio of zero net value established by buying and shorting component securities, usually in the context of an arbitrage strategy.


Full Definition of Zero-Investment Portfolio


A zero-investment portfolio is a collection of assets that have a net value of zero when created, and hence do not need an investor to take an equity position in the portfolio. For example, an investor may short sell $1,000 worth of stocks in one group of firms and reinvest the money in another group of companies.

  • A zero-investment portfolio is a financial portfolio made up of securities that cumulatively have no worth.
  • A portfolio with no investments that requires no equity is merely notional; a true zero-cost investment plan is not possible for a variety of reasons.
  • The most significant contribution of portfolio theory to our understanding of investments is that a portfolio of stocks can generate a higher risk-adjusted return than individual investments; yet, diversification of assets cannot totally eliminate risk.

A zero-investment portfolio that requires no equity is strictly theoretical; it does not exist in reality, but scholars researching finance are interested in this form of portfolio conceptually. A genuinely cost-free investment strategy is not possible for a variety of reasons. To begin, when an investor borrows stock from a broker in order to sell it and profit from its collapse, they must pledge a substantial portion of the proceeds as security. Second, short selling is regulated in the United States by the Securities and Exchange Commission (SEC), making it difficult for investors to maintain an appropriate balance of short and long assets. Finally, purchasing and selling securities requires investors to pay fees to brokers, which adds to the investor’s costs; a real-world attempt at a zero-investment portfolio would need the investor to risk his or her own capital.

Due to the peculiar characteristics of a zero-investment portfolio, it has no portfolio weight at all. A portfolio’s weight is typically computed by dividing the dollar amount invested in the portfolio by the total value of all of the portfolio’s investments. Due to the fact that the net value of a portfolio with no investments is zero, the denominator in the calculation is also zero. As a result, the equation is unsolvable.

Portfolio theory is a critical topic of study for finance and investing students and practitioners. The most significant contribution of portfolio theory to our knowledge of investing is that it demonstrates that a portfolio of stocks can generate a higher risk-adjusted return than individual investments. Diversification of assets, on the other hand, cannot totally reduce risk in the majority of real-world markets. Arbitrage opportunities are investment portfolios that guarantee a return without taking any risk, and academic finance theory generally considers that such scenarios are not viable in the actual world. If the rate of return on a real zero-investment portfolio equals or surpasses the risk-free rate of return, this portfolio is considered an arbitrage opportunity (usually assumed to be the rate one can earn from U.S. government bonds).

Arbitrage is the process of purchasing a certain quantity of securities in one market and concurrently selling the same or a similar quantity of securities in another market. Arbitrage can also be used to buy and sell securities of similar value in the same market. The objective of an arbitrage strategy is to reduce the total risk of losing money while taking advantage of profitable chances.


Related Phrases


Active portfolio strategy
Association for investment management and research
Balanced investment strategy
Balanced portfolio
Closed end investment company
Closed end investment company or fund
Complete portfolio
Dedicating a portfolio
Efficient portfolio
Excess return on the market portfolio
Expected return on investment
Factor portfolio
Feasible portfolio
Foreign direct investment
Future investment opportunities
Guaranteed investment contract
Guaranteed investment interest contract
Hedged portfolio
Initial investment
Investment account
Investment adviser
Investment analysts
Investment bank
Investment banker
Investment club
Investment company
Investment decisions
Investment flows
Investment grade bonds
Investment horizon
Investment income
Investment management
Investment manager
Investment opportunities schedule ios
Investment product line ipml
Investment quality
Investment tax credit
Investment trust
Investment value
Leveraged portfolio
Local government investment pool lgip
Market portfolio
Markowitz efficient portfolio
Mean variance efficient portfolio
Minimum variance portfolio
Modern portfolio theory
Mutually exclusive investment decisions
Net investment
Normal portfolio
Open end investment company
Open ended investment company
Optimal portfolio
Passive investment management
Passive investment strategy
Passive portfolio
Passive portfolio strategy
Portfolio
Portfolio analysis
Portfolio insurance
Portfolio internal rate of return
Portfolio management
Portfolio manager
Portfolio opportunity set
Portfolio separation theorem
Portfolio theory
Portfolio turnover rate
Portfolio variance
Real estate investment trust
Real estate mortgage investment conduit
Remic real estate mortgage investment conduit
Replicating portfolio
Return on investment
Short term investment services
Structured portfolio strategy
Tilted portfolio
Unit investment trust
Weighted average portfolio yield
Well diversified portfolio
Zero balance account
Zero beta portfolio
Zero cost collar
Zero coupon bond
Zero curve
Zero growth model
Zero minus tick
Zero one integer programming
Zero or low coupon bonds
Zero plus tick
Zero prepayment assumption
Zero sum game
Zero uptick


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Definition Sources


Definitions for Zero-Investment Portfolio are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 7th January, 2022 | 0 Views.