Reg. No.:
Market-neutral position long position in an element expected to do well and short position in a security expected to do badly. This is mostly done by professional traders trading for example a pair. This can be Forex ; USD/GBP or Google and Crude Oil. The purchase is made in the Hope as just as the price correlated commodities will converge again. When the market converges again, the profit is made from the deviation or pips the spread had caused. It should be noted that for market- Neutral position to be effective, the spread relationship between the two commodities should be highly related. Algebra can however be used to provide the relationship of a market-neutral relationships to guide the investor. This is by creating algebraic linear relationships.
Investors using the market-neutral specialize on picking commodities that are amply balanced to keep the selection buffered, going to the extent of having equal financial purchase of both. This takes care of market swing which practically means that risk is heavily averted.
It’s worth noting that majority market neutral, long/short equity funds use quantitative analysis as a guide in stock selection. This involves studying historical price patterns to project of a commodities future performance. Assessment of historical patterns and identification their relationships with present trends, and show the ranks.
When drawn in a graph and regression analysis is used. We can predict future results. Regressions analysis is a method in statistics predicting relationships in variables. Pairs of commodities or currency can thus be correctly drawn using the linear regression formula
Y= mx+c
This can be extrapolated to complex squared residuals and R ² can be calculated
For Dell and HP, the share prices were as follows:
On 5 there is a huge drop in Dell, of 30 where it should be 50. So we buy 100 Dell on long but only 20 HP as short because it’s in the negative
The profits can then be calculated as below:
For Dell: 100 x (50-30) = 2000
For HP: 20 x (50) = 1000
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