Hedged portfolios can be designed as theoretical tools, not just investment strategies.

Evidence

The hedged portfolio had been the central idea of Thorp and Kassouf’s book Beat the Market, which Scholes had not yet read (Scholes interview). Scholes’s goal, in any case, was different. Thorp and Kassouf’s hedged portfolio was designed to earn high returns with low risk in real markets. Scholes’s was a desired theoretical artifact. He wanted a portfolio with a beta of zero: that is, with no correlation with the overall level of the market. If such a portfolio could be created, the Capital Asset Pricing Model implied (as noted above) that it would earn, not high returns, but only the riskless rate of interest. It would thus not be an unduly enticing investment, but knowing the rate of return on the hedged portfolio might solve the problem of warrant pricing. — Donald MacKenzie, An Engine, Not a Camera, 576

Categorization

• DEFINE: Distinguishes the zero-beta theoretical hedged portfolio from the practical hedged portfolio — a conceptual pivot essential to the Black-Scholes derivation.
• XREF: Connects to CAPM foundations from the earlier chapter — the zero-beta claim draws directly on that model’s riskless-rate logic. — connects to: Financial theories can become true by guiding the practices they describe — Gerald F. Davis & Suntae Kim, Financialization of the Economy, 38

Broader Connections

• Financial theories can become true by guiding the practices they describe #expands (0.75) — Gerald F. Davis & Suntae Kim, Financialization of the Economy, 38