Taxation and Black's Zero-Beta Strategy Revisited

Robert Faff, David Hillier, Justin Wood

Research output: Contribution to journalArticleResearchpeer-review

1 Citation (Scopus)


Fischer Black's strategy of skewing portfolios to low-beta stocks makes sense in non-U.S. markets if a "flat" relationship between beta and return exists in those markets as it does in the U.S. market. Theory suggests, however, that for taxation reasons, the relationship between beta and return will be more steeply sloped in markets like that of Australia, where dividend-imputation taxation has been adopted, than in the U.S. market, where classical taxation prevails. We document empirically that the relationship between beta and return has been, in fact, more steeply sloped in the Australian market in the postimputation period. Moreover, we found a significantly positive excess return on the "zero-beta factor" in the preimputation period but a zero or significantly negative excess return on the zero-beta factor in the postimputation period. The implication is that following the zero-beta investment strategy in an economy that includes an imputation tax may not be successful.

Original languageEnglish
Pages (from-to)57-65
Number of pages9
JournalFinancial Analysts Journal
Issue number5
Publication statusPublished - 2001
Externally publishedYes


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