11. Winners and Losers Content Quiz

Winners and Losers

Let’s approximate the stock price over time with the formula:

y = \textrm{Gain} \times t + \textrm{Accelerate} \times t^2,

where t represents the passage of time in days. Stock A has Gain = 1 and Accelerate = 2, while stock B has Gain = 1 and Accelerate = 4. Which of the following would be sensible choices for a long-short portfolio?

SOLUTION:
  • Long both stock A and stock B, but put more long weight on stock B
  • Short stock A and long stock B
  • Short stock A and stock B, but put a larger short position on stock A

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