In your previous magazine issue, the editor has written about the concept of beta while picking stocks in the current market scenario. I would like to know how does portfolio hedging with beta work?
- Manas Panikkar
Editor Responds: Thank you for writing to us. As an investor, if you have a certain amount of long position in equities, you can sell the equivalent amount in futures and perfectly hedge your position. But if you have a portfolio of stocks, selling futures against each individual stock may not make sense. In this case, if you create a portfolio of stocks that has a low beta correlation to each other, the overall risk of your portfolio is reduced. Hence, one can reduce the systematic risk in a portfolio by purchasing stocks with offsetting betas.