Final answer:
Negative beta assets, such as government bonds or gold, can be combined with a positive beta asset to produce a zero-beta portfolio. However, they do not provide any diversification benefits.
Step-by-step explanation:
In finance, the beta coefficient measures the sensitivity of an asset's returns to the returns of the overall market. A positive beta indicates that the asset tends to move in the same direction as the market, while a negative beta indicates that the asset tends to move in the opposite direction of the market.
Negative beta assets, such as government bonds or gold, are considered to be defensive assets. They can act as a hedge against market downturns because their returns tend to move in the opposite direction of the market. However, they do not provide any diversification benefits when combined with a positive beta asset because their movements cancel each other out, resulting in a zero-beta portfolio.
For example, if an investor combines a positive beta stock with a negative beta asset like gold, the portfolio will have a beta of close to zero. This means that the portfolio's returns will not be affected by the overall market movements, providing a more stable investment option.