FRM Part II · FRM Exam Part II · Hedge Fund Investment Strategies
A long/short equity manager's portfolio has a long book beta of 0.9 and a short book beta of 1.1, with long positions of 80% of capital and short positions of 60% of capital. What is the portfolio's net beta exposure relative to capital?
Net beta is long beta exposure minus short beta exposure: 0.8 times 0.9 equals 0.72, less 0.6 times 1.1 equals 0.66, giving 0.06. The fund is nearly beta neutral even though its dollar net exposure is 20% of capital.
- A0.06Correct
- B0.20
- C0.72
- D0.66
Explanation
Long beta contribution is 0.8 x 0.9 = 0.72 and short contribution is 0.6 x 1.1 = 0.66. Net beta is 0.72 - 0.66 = 0.06. Using 0.72 alone ignores the short hedge, and 0.20 is just the dollar net exposure.
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