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Can risk-free and zero-beta portfolios be constructed? UK and US Evidence

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  • He, Zhen
  • O'Connor, Fergal
  • Thijssen, Jacco

Abstract

This paper determines whether a risk-free portfolio can be formed using gold, T-bills, silver, platinum, and palladium. We construct zero-variance portfolios composed of two assets showing that it is possible to construct risk-free portfolios based on zero variance. We apply Wald tests to Black's zero-beta CAPM to examine whether these constructed risk-free portfolios qualify as zero-beta portfolios. We find that a risk-free portfolio is not always a zero-beta portfolio. Results show that a risk-free portfolio and a zero-beta portfolio in one market is not necessarily so in another.

Suggested Citation

  • He, Zhen & O'Connor, Fergal & Thijssen, Jacco, 2025. "Can risk-free and zero-beta portfolios be constructed? UK and US Evidence," Economics Letters, Elsevier, vol. 250(C).
    • Handle: RePEc:eee:ecolet:v:250:y:2025:i:c:s0165176525001454
    DOI: 10.1016/j.econlet.2025.112308
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    References listed on IDEAS

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    1. David Hillier & Paul Draper & Robert Faff, 2006. "Do Precious Metals Shine? An Investment Perspective," Financial Analysts Journal, Taylor & Francis Journals, vol. 62(2), pages 98-106, March.
    2. He, Zhen & O'Connor, Fergal & Thijssen, Jacco, 2018. "Is gold a Sometime Safe Haven or an Always Hedge for equity investors? A Markov-Switching CAPM approach for US and UK stock indices," International Review of Financial Analysis, Elsevier, vol. 60(C), pages 30-37.
    3. He, Zhen & O’Connor, Fergal & Thijssen, Jacco, 2022. "Identifying proxies for risk-free assets: Evidence from the zero-beta capital asset pricing model," Research in International Business and Finance, Elsevier, vol. 63(C).
    4. Batten, Jonathan A. & Ciner, Cetin & Lucey, Brian M., 2010. "The macroeconomic determinants of volatility in precious metals markets," Resources Policy, Elsevier, vol. 35(2), pages 65-71, June.
    5. Brian M. Lucey & Sile Li, 2015. "What precious metals act as safe havens, and when? Some US evidence," Applied Economics Letters, Taylor & Francis Journals, vol. 22(1), pages 35-45, January.
    6. Vigne, Samuel A. & Lucey, Brian M. & O’Connor, Fergal A. & Yarovaya, Larisa, 2017. "The financial economics of white precious metals — A survey," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 292-308.
    7. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
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