I just don’t get what the alpha beta seperation is doing in this example.
As why do we short the S&P/TSX to create our alpha? As we are betting against him???
portable alpha has 2 components:
alpha exposure: always paird. you would long an equity position and short an equity index position to eliminate beta.
beta exposure: simply long the index.
in this case, client long the european index for its upward trending market. (beta)
because canadian market not doing so good, he wanna hedge beta exposure but want to keep the alpha.
Thanks for the response, but how do we know the canadian market isn’t doing well?
I think this way…
Tan is looking to add midcap exposure & has already identified a long only canadian manager…
she thinks midcap stocks are effecient (as she thinks nobody generates alpha here) so she can have a beta exposure here by going long on midcap futures
Tan’s canadian manager is a LONG ONLY canadian stocks…Dodson should advise her to short the index to be market neutral…