In the text it says market neutral identify over and undervalue stocks and uses shorting to net out sector and market exposures therefore neutralizing market risk. But don’t they also diversify away systematic risk by using pairs from various industries? It rarely mentions this but I think it’s mentioned somewhere else?
Long / Short in the same industry takes away systematic risk… Not sure where I read that… awwwww I just blacked out a little… What happened?
Right but I thought market neutral combines long shorts in various industries i.e. IT, consumer staples etc so it takes away nonsystematic risk. Instead of diverisifying with stocks you diversify with pairs no?
Paddles…CLEAR!..PSSSSHHHHTT…350…CLEAR!..PSSSHHHTTT…Doctor I have a pulse…WElcome back MGG Oh and in regards to AC’s question. Yes Mkt Neutral funds will/can do Pairs trade to “eliminate” systematic risk if they are Beta Neutral. If they are dollar Neutral then that is different, but yes for exam purpose you are correct.
You lost me with the dollar and beta neutral…guess follow what Stalla says and stick with the book. Since they only mention sys neutralization I’m just gonna say that and avoid diversifying with pairs. thx guys
Beta Neutral means that you overall Net Beta is 0. Dollar Neutral means that your Net Exposure is 0%.