Market Neutral
An investment strategy or portfolio is considered market-neutral if it seeks to entirely avoid some form of market risk, typically by hedging. In order to evaluate market-neutrality, it is first necessary to specify the risk being avoided. For example, convertible arbitrage attempts to fully hedge fluctuations in the price of the underlying common stock.
A portfolio is truly market-neutral if it exhibits zero correlation with the unwanted source of risk. Market neutrality is an ideal, which is seldom possible in practice. A portfolio which appears to be market-neutral may exhibit unexpected correlations as market conditions change. The risk of this occurring is called basis risk.
Read more about Market Neutral: Equity-market-neutral, Examples of Market-neutral Strategies
Famous quotes containing the words market and/or neutral:
“Today the tyrant rules not by club or fist, but, disguised as a market researcher, he shepherds his flocks in the ways of utility and comfort.”
—Marshall McLuhan (1911–1980)
“I feel the carousel starting slowly
And going faster and faster: desk, papers, books,
Photographs of friends, the window and the trees
Merging in one neutral band that surrounds
Me on all sides, everywhere I look.”
—John Ashbery (b. 1927)