0
$\begingroup$

I was reading the famous paper "Betting against Beta" by Frazzini et al. They created BAB factor in which a portfolio is created by holding low beta assets, leveraged to a beta of one" and shorts the high beta assets, deleveraged to a beta of one. I understand the holding and short part, but not able to understand leveraged to a beta of one and deleveraged to a beta of one.

$\endgroup$
2
  • 2
    $\begingroup$ Are you familiar with "buying stocks on margin" i.e. you put up your own money plus additional money that you borrow. That is how you leverage. To deleverage you set aside some of your money and only use the rest of it to buy stocks.. Example: Start with 1000 USD, borrow another 1000. Now invest 2000 in a stock with Beta 0.5. You are now "leveraged to a Beta of 1" on your original 1000 equity. $\endgroup$ – noob2 May 13 at 12:31
  • 1
    $\begingroup$ Example #2. You have 1000 USD available in your account against which you want to short Stock B with Beta 1.5. So you short only 666.66 USD worth of Stock B. You are now deleveraged to a Beta of 1. $\endgroup$ – noob2 May 13 at 12:44

Your Answer

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

Browse other questions tagged or ask your own question.