Market neutral

From Wikipedia, the free encyclopedia

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.

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