Advanced Portfolio Management. Giuseppe A. Paleologo

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Advanced Portfolio Management - Giuseppe A. Paleologo


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Simple Hedging

Field SYF WMT SPY
Beta 1.2 0.5 1
Daily Market Vol (%) 1.4
Daily Idio Vol (%) 1.2 0.7 0.0
Net Market Value ($M) 10 5 −15.5

      Procedure 3.2 Compute the market hedge of a portfolio.

      1 Compute the dollar betas for the individual positions of the unhedged portfolio;

      2 Compute the dollar portfolio beta as the sum of the individual betas;

      3 Compute the market hedge NMV, whose value is equal to the opposite of the portfolio beta.

      Risk models serve four main purposes:

      1 Risk Measurement: Estimate the volatility of a portfolio, and from this estimate, the probability of the loss exceeding a certain threshold.

      2 Risk Decomposition: The risk comes either from common sources (systematic component) or stock-specific sources.

      3 Performance Attribution: Systematic and idiosyncratic sources of returns determine also the performance, and the entire performance of a book through time can be attributed to a combination of both.

      4 Hedging: Once the systematic source of risk has been identified, it can be removed without affecting the idiosyncratic sources of return (and risk).

      1 1 SPY is an ETF closely tracking the SP500 index.

      2 2 Actually, not that easy. See the notes at the end of this chapter for more details on this topic.

      3 3 See the surveys by Gabaix [2009], Cont [2001] and references therein.

      4 4 This does not mean that the average absolute size of returns is 1%; see the FAQ chapter for an explanation.

      5 5 The Net Market Value, or NMV, is the signed dollar holding value of security held in a portfolio.

      6 6


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