An example in the book, Quantiative Trading, the net return of a dollar neutral strategy of IGE and SPY is calculated.

% net daily returns
(divide by 2 because we now have twice as much capital.)
netRet=(dailyretIGE - dailyretSPY)/2;

I don't understand why we divide by 2. We essentially use the short sell from SPY to purchase shares of IGE for the dollar neutral strategy. Wouldn't the net return just be the daily return of IGE - daily return of spy? Hypothetically if I get 100 dollars by short selling spy and i use that to purchase 100$ shares of IGE, if a daily return of IGE is 10% while SPY is 5% then the net return will be 5% of my initial investment of 100 dollars totaling 105 dollars. Why are we dividing by 2?


1 Answer 1


Yes, you can just do IGE - SPY if you assume the short finances the long.

The Sharpe ratio will be the same whether or not you divide by 2.


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