A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

by Edward O. Thorp

Our computer simulations and experience show that this portfolio is close to market-neutral, which means that the fluctuations in the value of the portfolio have little correlation to the overall average price changes in the market. Our level of market neutrality, measured by what financial theorists call beta, has averaged 0.06. When beta is zero for a portfolio, its price movements have no correlation with those of the market, and it is called market-neutral. Portfolios with positive beta tend to move up and down with the market, more so for larger beta. The beta of the market itself is chosen to be 1.0. Negative beta portfolios tend to fluctuate oppositely to the market. Our risk-adjusted excess return, the amount by which our annualized return has exceeded that from investments of comparable risk and called alpha by finance theorists, has averaged about 20 percent per year. This means that our past annual rate of return (before fees) of 26 percent can be thought of as the sum of three parts: 5 percent from Treasury bills with no risk, about 1 percent due to our slight correlation to the market, plus the remaining 20 percent, the amount by which our return exceeds investments with comparable risk.