FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies
A long/short equity manager holds USD 80 million of long positions with a portfolio beta of 1.2 and USD 50 million of short positions with a portfolio beta of 0.8. Fund capital is USD 100 million. What is the fund's net beta-adjusted exposure as a percentage of capital?
Net beta-adjusted exposure is 56% of capital. The long book contributes 96 million (80 x 1.2) and the short book offsets 40 million (50 x 0.8), leaving 56 million on 100 million of capital. Dollar-neutral thinking would understate market risk here.
- A56%Correct
- B30%
- C96%
- D40%
Explanation
Beta-adjusted long = 80 x 1.2 = 96 million. Beta-adjusted short = 50 x 0.8 = 40 million. Net = 56 million, which is 56% of 100 million capital. Using dollar net (30%) ignores differing betas; 40% uses only the short side.
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