Best Hedge

[phwdisse]

Dear David,

In the formula of “Best Hedge” in Investment Risk there is a negative sign. –W * Beta *var(p)/Var(i). What is the meaning of this negative sign? Do you always have to sell (short) the asset i?

Kind Regards
Paul

 

[David Harper CFA FRM]

No, only if the underlying is beta positive. (you'd go long if the underlying is beta negative). The var()/var() will always be positive, but beta can be negative (e.g., Andrew Lo's Dedicated Short Bias strategy has negative beta). If negative beta, you'd go long to hedge. David

 

[phwdisse]

:red: sorry. Your right(as always). Of course Beta can be negative.