Market Neutral Portfolio Selection: A Pedagogic Illustration

Abstract

This paper considers market neutral portfolio selection, which is an advanced investment topic. It draws on an idea in the investment literature that short selling a stock in practice is like investing in an artificially constructed security. Such an idea allows this paper to extend textbook coverage of portfolio selection without short sales to a realistic long-short setting. Spreadsheet illustrations are provided, with and without using the derived analytical results. Thus, the pedagogic materials as covered in this paper can accommodate investment courses with different levels of analytical rigor.