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long/short strategy has a beta of 0 or 1?

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I suppose that it could have whatever β you want.  Merely being long-short doesn’t, in isolation, imply a specific β.

Perhaps you’re thinking of a market-neutral (which is typically a long-short) strategy: that’s supposed to have β = 0.

Simplify the complicated side; don't complify the simplicated side.

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S2000magician wrote:

Perhaps you’re thinking of a market-neutral (which is typically a long-short) strategy: that’s supposed to have β = 0.

Yes!!!

I understand that:

If you are more long than short, then beta >0

If you are more short than long, then beta <0

Is this correct?

Las almas de todos los hombres son inmortales, pero las almas de los justos son inmortales y divinas.
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Harrogath wrote:

I understand that:

If you are more long than short, then beta >0 (a)

If you are more short than long, then beta <0 (b)

Is this correct?

No… my bad. The beta in (a) would be higher than in (b), but both positive. 

Las almas de todos los hombres son inmortales, pero las almas de los justos son inmortales y divinas.
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Harrogath wrote:
Harrogath wrote:
I understand that:

If you are more long than short, then beta >0 (a)

If you are more short than long, then beta <0 (b)

Is this correct?

No… my bad. The beta in (a) would be higher than in (b), but both positive.

It all depends on the securities you choose (and on what, exactly, you mean by “more long than short” and “more short than long”).

For example:

  • if you’re long $1,000,000 in a stock with a beta of 2.0 and short $800,000 in a stock with a beta of 1.0, your portfolio beta will be positive
  • if you’re long $1,000,000 in a stock with a beta of 1.0 and short $800,000 in a stock with a beta of 2.0, your portfolio beta will be positive
  • if you’re long $800,000 in a stock with a beta of 1.0 and short $1,000,000 in a stock with a beta of 2.0, your portfolio beta will be negative

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/

S2000magician wrote:

Harrogath wrote:
Harrogath wrote:
I understand that:

If you are more long than short, then beta >0 (a)

If you are more short than long, then beta <0 (b)

Is this correct?

No… my bad. The beta in (a) would be higher than in (b), but both positive.

It all depends on the securities you choose (and on what, exactly, you mean by “more long than short” and “more short than long”).

I was assuming the same stock, however is just 1 case even out of the cases as you show below.

I have just read the chapter about wealth concentration management and it talks about how the investor can “monetize” its concentrated wealth by going 100% short its own position (hedge with a beta of 0), loan against the hedged position as it is virtually riskless and then invest in a diversified portfolio.

S2000magician wrote:

For example:

  • if you’re long $1,000,000 in a stock with a beta of 2.0 and short $800,000 in a stock with a beta of 1.0, your portfolio beta will be positive
  • if you’re long $1,000,000 in a stock with a beta of 1.0 and short $800,000 in a stock with a beta of 2.0, your portfolio beta will be positive
  • if you’re long $800,000 in a stock with a beta of 1.0 and short $1,000,000 in a stock with a beta of 2.0, your portfolio beta will be negative

Excellent, thanks for the examples! It is all clear now.

Las almas de todos los hombres son inmortales, pero las almas de los justos son inmortales y divinas.
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