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Orthogonal Portfolios

Published online by Cambridge University Press:  06 April 2009

Richard Roll
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Extract

There is a false, but widely-held belief about orthogonal (“zero-beta”) portfolios: for a given market index, all zero-beta portfolios have the same expected return and the minimal-variance, zero-beta portfolio is unique. This is true only when the index is mean/variance efficient. Every nonefficient index possesses zero-beta portfolios at all levels of expected return. For a given index, minimal-variance zero-beta portfolios corresponding to different expected returns lie along an “orthogonal frontier” in the mean/variance space. The frontier has some unusual properties which turn out to be relevant for empirical work on asset pricing. It is functionally related to deviations about the “securities market line.”

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 15 , Issue 5 , December 1980 , pp. 1005 - 1023
Copyright
Copyright © School of Business Administration, University of Washington 1980

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References

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