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:
“Writing ought either to be the manufacture of stories for which there is a market demand—a business as safe and commendable as making soap or breakfast foods—or it should be an art, which is always a search for something for which there is no market demand, something new and untried, where the values are intrinsic and have nothing to do with standardized values.”
—Willa Cather (1876–1947)
“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)