What is the impact of a zero beta portfolio on investment returns?

A zero beta portfolio is one that has no correlation with the market's movements and consequently has a beta of zero. This characteristic means that the portfolio's returns are not affected by market fluctuations. Instead, it reflects returns that are more akin to the risk-free rate of return, typically represented by government bonds or similar low-risk investments.

Investors utilize zero beta portfolios to minimize exposure to market risk while aiming for returns that are stable and predictable. The performance of such portfolios does not fluctuate with the market, which usually results in returns that align closely with the risk-free rate, providing a reliable place to allocate capital without taking on undue risk.

In contrast, traditional investments that have higher betas expose investors to greater market risk and potential higher returns, but the risk-free nature of a zero beta portfolio makes it an attractive choice for risk-averse investors. This leads to the understanding that such portfolios serve as safe harbors for wealth protection rather than vehicles for aggressive growth strategies.