Write an essay about: 1) How can a portfolio manager use beta to manage a portfolio....

Write an essay about:

1) How can a portfolio manager use beta to manage a portfolio. Give examples of different types of strategies.

(The essay should be one page long)

Write an essay about:

2) Explain the difference between being a long and being a short on stock. Also tell the advantages and disadvantages.

(The essay should be only one page long) Thanks

Solutions

Expert Solution

1) Beta is an indicator which tells us about the volatility of the stock with respect to the broader market. A stock with a beta larger than 1 indicates that the stock is more volatile and would fluctuate more than the market. While a stock with beta less than 1 would be more conservative and would be less volatile. A higher volatility and beta is also indicative of higher risks and for a portfolio manager, higher risks should be accompanied by higher returns as well. Also, beta of a portfolio is an additive sum of the betas of individual stocks in the portfolio. So in a portfolio, it is essential to have a good mix of stocks with few stocks having a large beta (beta less than 1) and some stocks with beta less than 1.0. With such a combination, the overall beta of the portfolio can be managed to ensure that the volatility of the portfolio is low and at the same time ensuring adequate risk adjusted returns for the investors.

2) Going long on a stock means that one has bought that stock and is expected to profit on the appreciation of its price. While going short would mean that the investor has sold the stock with a belief that the stock would depreciate in the future and thus would gain from selling high today and buying it back at a later date when the price is lower.
The advantages of going long is that:-
a) The extent of gain or upside is unlimited.
b) It is taking a position which is dependent on the economic growth and hence is more likely to succeed in the long term.

Disadvantages being:-
a) One can not benefit from this position if there is a recession or pessimism in the economy.

Advantages of going short are:-
a) Can benefit even from falling stock prices

Disadvantages are:-
a) An opposite move would lead to unlimited loss

jeff jeffy answered 1 year ago

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