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Published December 1980 | public
Journal Article

Orthogonal Portfolios

Roll, Richard

Abstract

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."

Additional Information

© 1980 School of Business Administration, University of Washington. This research was supported by a grant from The Foundation for Research in Economics and Education which does not necessarily agree with the conclusions. The comments and suggestions of the referee, Gordon J. Alexander, were unusually helpful and thorough. Of course, all remaining statements must be blamed solely on the author.

Additional details

Created:
August 19, 2023
Modified:
October 20, 2023