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:
“To market ‘tis our destiny to go.”
—Robert Frost (1874–1963)
“The seashore is a sort of neutral ground, a most advantageous point from which to contemplate this world. It is even a trivial place. The waves forever rolling to the land are too far-traveled and untamable to be familiar. Creeping along the endless beach amid the sun-squall and the foam, it occurs to us that we, too, are the product of sea-slime.”
—Henry David Thoreau (1817–1862)