Schweser Mock 1 AM 6B
is this also a short extension approach? (overall beta is basically 1…)
answer says it is “long/short portfolio that is net 100% long…”
many thanks!
any insight?
Equity portfolio management - 5.3.4
Short stock, invest it in long. So say you had two separate strategies, 100/0 long and 0/30 short (uncordinated). Short extension is a coordinated strategy where you take the short money and pump it into long. So you are in a COORDINATED position of 130/30.
U mean it`s the uncordinated long/short in contrast to short extension?
i get it… many thanks!
Yeah…they are different. 5.3.4 is really short and sweet. I’d read it if I were you. But pretty much say instead of doing a 130/30 (short 30 long 130), you did a long 100 and Short 30 (Uncoordinated). Say you invested 100 in an index fund, and shorted a stock that was in the indexed fund. You have long exposure via the index fund. In a coordinated (130/30), you would not have that.
Good to know about the coordination. Didn’t see that in the Kaplan book.
Just want to confirm. Why would 130/30 short extension not have a long exposure? Since we are still net “100” in total, wouldn’t the long exposure be still 100?
Thanks!
it does have long exposure. We have stock A and B.
Take client money of 100 dollars, Invest in A. Short B, get 30 dollars, invest that in A. We now have 130 dollars in A, -30 IN B. It’s alpha comes from one source, compared to equitizing the Long-Short (where you get your long, short, futures contract change, and risk free rate of cash for futures contract). 5.3 does a good job explaining it (Equity Portfolio) and it’s relatively short. Worth the read.
short extension:
Pro: Doesn’t require a liquid futures or swap market. Lets you gain from managers expertise of long stocks to pick.
Cons: Depends on the same source of alpha.
Equitizing the short:
Pros: Lets you get additional exposure to equity index + Active skill. Lets you gain multiple types of return (long/Short gains, Future Gains, RF on cash).
Cons: Not 100%…book doesn’t really list them. But I’d assume that cons could be that your short stock is included in the index possibly, and that futures can move against you. Also, you aren’t really market neutral at that point…since you have beta exposure from the index.
alpha source in equitizing can be different. Wheras, short extension can be linked to a pairs trade where source of mkt return and alpha is the same.
Only Con i can think of for equitizing the short is whether you’re using futures or ETF - ETFs don’t have a finite life, whereas, futures do AND futures cannot short on downtick
I see. You meant the additional exposure by investing in the index fund and this is the exposure short extension does not have. I did read that part yesterday and agree with you that is helpful especially Kaplan does not mention the corridination.
Thank you!