Beta Hedging
Ninad RamdasiCategories: DSIJ_Magazine_Web, DSIJMagazine_App, Editorial, Letter to Editor, Letter to Editor
In your previous magazine issue, the editor has written about the concept of beta while picking stocks in the current market scenario. I would like to know how does portfolio hedging with beta work?
In your previous magazine issue, the editor has written about the concept of beta while picking stocks in the current market scenario. I would like to know how does portfolio hedging with beta work?
- Manas Panikkar
Editor Responds: Thank you for writing to us. As an investor, if you have a certain amount of long position in equities, you can sell the equivalent amount in futures and perfectly hedge your position. But if you have a portfolio of stocks, selling futures against each individual stock may not make sense. In this case, if you create a portfolio of stocks that has a low beta correlation to each other, the overall risk of your portfolio is reduced. Hence, one can reduce the systematic risk in a portfolio by purchasing stocks with offsetting betas.