Which of the following statements about equitizing a long- short portfolio is least accurate? A. In can be accomplished by taking a long position in a n equity futures contract with a notional principal equal to the cash flow from the short sale. B. The investors total return equals the net profit or loss from the long/short position plus the profit or loss from the futures contract, all divided by equity the investor has put up. C. The benchmark for the equitized strategy should be index underlying the futures contract Explanation please.
B? We get short rebate and include them in a return.
B is inaccurate. Total return from equitizing = net profit on long/short position + profit/loss from futures contract + interest earned from cash received on the short sale. Remember when are start off as a long/short market neutral position. You decided you want to get exposure to an equity exposure. You go long the respective index. You also got cash lying around from your short sale. That should be earning interest.
Agreed, it’s B because it’s missing the short interest
B is inaccurate since short interest is missing C is inaccurate since ETF is missing A is the correct answer.
Captain Barbosa Wrote: ------------------------------------------------------- > B is inaccurate since short interest is missing > C is inaccurate since ETF is missing > > A is the correct answer. It is asking for least accurate and hence answer is B. About C - Benchmark can be either future OR ETF and not necessarily both.
shouldn’t it include the short sale money you invest in cash
alimesoda Wrote: ------------------------------------------------------- > shouldn’t it include the short sale money you > invest in cash See posts #2, 3, 4, and the first line of post #5.
It’s nice to see the responses like these. Thanks guys, answer is B. I’m still confused about A though.
What about A is confusing you?
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > What about A is confusing you? “notional principal equal to the cash flow from the short sale” Cash flow from the short sale is not going to be much. Why that has to be the notional principal for futures?
derswap07, I also got confused with A. Do you have the text-book explanation?
What other sources of cash would you have? If you’re L-S neutral, than in order to get systemic exposure by “equitizing” it you need to gain it in a long position somewhere (future, etc).
future is cheaper to buy than buying equity
Sponge_Bob_CFA Wrote: ------------------------------------------------------- > What other sources of cash would you have? If > you’re L-S neutral, than in order to get systemic > exposure by “equitizing” it you need to gain it in > a long position somewhere (future, etc). Correct. But why equal to notional of a short sale?
Because that is the amount you are getting after shorting it and now you want to invest that amount to buy future. You don’t want to invest money from your pocket.
ok. Now that makes sense.
I suppose it would be more correct to say the notional would be equal to no greater than proceeds from short sale, but that is splitting hairs.
A. notion of of equilized future is not related to short position in anyway. the bench mark for equalized l/s position is the index future/etf, to make bench mark comparable to the equalized l/s, exposure to systematic risk factor must be comparable, that says a lot about the notion. the notion must = the equity portion investor put in, otherwise the systematic risk factor, beta in this case would not match.
I suggest you review that topic some more dkitty.