long/short strategy has a beta of 0 or 1?

CFA Level III
#1

[original post removed]

#2

I suppose that it could have whatever β you want. Merely being long-short doesn’t, in isolation, imply a specific β.

Perhaps you’re thinking of a market-neutral (which is typically a long-short) strategy: that’s supposed to have β = 0_._

#3

Yes!!!

#4

I understand that:

If you are more long than short, then beta >0

If you are more short than long, then beta <0

Is this correct?

#5

No… my bad. The beta in (a) would be higher than in (b), but both positive.

#6

It all depends on the securities you choose (and on what, exactly, you mean by “more long than short” and “more short than long”).

For example:

  • if you’re long $1,000,000 in a stock with a beta of 2.0 and short $800,000 in a stock with a beta of 1.0, your portfolio beta will be positive
  • if you’re long $1,000,000 in a stock with a beta of 1.0 and short $800,000 in a stock with a beta of 2.0, your portfolio beta will be positive
  • if you’re long $800,000 in a stock with a beta of 1.0 and short $1,000,000 in a stock with a beta of 2.0, your portfolio beta will be negative
#7

I was assuming the same stock, however is just 1 case even out of the cases as you show below.

I have just read the chapter about wealth concentration management and it talks about how the investor can “monetize” its concentrated wealth by going 100% short its own position (hedge with a beta of 0), loan against the hedged position as it is virtually riskless and then invest in a diversified portfolio.

Excellent, thanks for the examples! It is all clear now.