What could theoretically allow for a risky asset to have a beta of zero?

What could theoretically allow for a risky asset to have a beta of zero?

• A. A perfectly correlated market
• B. A portfolio of risky assets with balanced risk
• C. A risk-free government bond
• D. An asset with no market risk exposure

Answer: (B)

The correct choice indicates that a portfolio of risky assets with balanced risk could theoretically have a beta of zero. Beta measures an asset's sensitivity to movements in the market, and a beta of zero suggests that the asset's returns are not correlated with market returns. When constructing a portfolio with multiple risky assets, if the individual assets have varying levels of risk and are perfectly negatively correlated, it is possible to create a balance where the overall portfolio's risk cancels out. This is akin to diversification but taken to an extreme where the net effect of all included risks results in a situation where the portfolio does not respond to market movements. Essentially, the risks involved in individual assets may offset one another, leading to a situation where the combined portfolio has no sensitivity to market returns—hence, a beta of zero. In contrast to the other options, a perfectly correlated market would imply a high beta for assets, as they would react strongly to market changes. A risk-free government bond carries a beta of zero, but it is not classified as a risky asset. An asset with no market risk exposure describes an ideal scenario for risk-free investments, yet it does not fit the context of risky assets. Thus, the concept of a portfolio of risky assets with balanced risk

The correct choice indicates that a portfolio of risky assets with balanced risk could theoretically have a beta of zero. Beta measures an asset's sensitivity to movements in the market, and a beta of zero suggests that the asset's returns are not correlated with market returns.

When constructing a portfolio with multiple risky assets, if the individual assets have varying levels of risk and are perfectly negatively correlated, it is possible to create a balance where the overall portfolio's risk cancels out. This is akin to diversification but taken to an extreme where the net effect of all included risks results in a situation where the portfolio does not respond to market movements. Essentially, the risks involved in individual assets may offset one another, leading to a situation where the combined portfolio has no sensitivity to market returns—hence, a beta of zero.

In contrast to the other options, a perfectly correlated market would imply a high beta for assets, as they would react strongly to market changes. A risk-free government bond carries a beta of zero, but it is not classified as a risky asset. An asset with no market risk exposure describes an ideal scenario for risk-free investments, yet it does not fit the context of risky assets. Thus, the concept of a portfolio of risky assets with balanced risk