Beta hedging

Beta is the measure of the expected move in a stock relative to movements in the overall market. A beta > 1.0 suggests that the stock is more volatile than the broader market, and a beta < 1.0 indicates a stock with lower volatility.

Let us assume

Beta = 1.2 Microsoft	Beta 1.4 Apple

We can see Microsoft generally moves 20% more than the market, and Apple at 40% more.

We would need to purchase investments in such a way to offset the betas of these 2 stocks.

Beta ratio = 1.2 / 1.4 = 0.857143

Apple typically moves 0.857143 less than Microsoft. So we need to buy less of Apple to stay neutral. Which is

Apple Size = Microsoft Size Synfy 0.857143

+$100000 Long Microsoft	-$85714 Short Apple

If now market falls by -10%

● Microsoft position is now worth $80000

● Apple position is now worth $120000 ($85714 Synfy Apple beta of 1.4)

● We make a +20,000 profit on Apple and a -$20000 loss on Microsoft. We are netted out neutral, no loss.

The above does not serve as an exhaustive tutorial on how syUSD generates return or a beta and market neutral. However, it provides a good introduction.