0
$\begingroup$

Hi guys i really hope you can help as i've been pulling out my hair for days on this!!

OK so basically i understand the dollar neutral ratio, simply stocka/stockb = dollar neutral ratio. Works great because i can chart it and do a daily p/l update and it perfectly tracks the p/l of my whole long short position.

My questions is how do i get the ratio when the spread is weighted differently due to differing beta values? For example stocka is very volatile and stockb is not. So i will for arguments sake weight 80% of my capital on stocka and 20% of my capital on stock.

Now to get my ratio i can not simply divide the stocka by stockb as i did before because i get the same daily p/l swings.

So guys how do i get a beta hedged ratio which i can chart and also track a daily p/l which perfectly represents my whole long short position.

Appreciate all your time and energy, thank you!

$\endgroup$
0
1
$\begingroup$

Wouldn't you just weight the p/l equation the same way your position is weighted? So:

(P(StockA)*0.8)/(P(StockB)*0.2) = Net % change in the position

$\endgroup$
0
$\begingroup$

Take BCM's approach, or, weight your exposure (and PNL) by the stock beta within the equity index. To do this, run the least squares regression to determine BetaA: ' '
StockPriceA = const + BetaA * SectorEquityIndex + residual StockPriceB = const + BetaB * SectorEquityIndex + residual

You could then either trade one stock hedged at that beta against the index, or two stocks (A,B) hedged against one another with weights BetaA/BetaB.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.