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I highly doubt your assessment. When you have a short position, with underlying values you don't own, you have a leveraged investment. Which is inherently more
by macco 4y ago
I highly doubt your assessment. When you have a short position, with underlying values you don't own, you have a leveraged investment. Which is inherently more risky than investments in a base value.
The idea is not to have perfect negative correlations, but to find values with some negative correlation. This way you can profit from falling prices of an asset. Not with a 1 to 1 yield, or even higher.
- snake_doc 4y agoIn equity markets, risk is measured in volatility or the standard deviation of return. By definition a short and long position of an equity has the same volatility or standard deviation of returns. You may be using the term risk colloquially, but your understanding of leverage under a short sale is also misguided. If you short a stock and have cash to cover, you don’t need leverage. If you short a stock and the position is in the black, you don’t need leverage. You only need leverage if your short position is in the net negative. Yes, you may have to pay borrowing costs for the stock, but that’s just normally known as transaction costs. Until you require leverage to keep the short position open when it’s net negative or you used the cash proceeds, you are not leveraged. If your goal is to manage the maximum loss from a short position, it’s much easier to short the stock and buy a protective put. This gives you perfect exposure to your bet, while allowing you to manage your loss exactly.