Market-Neutral Strategy
1) Market-neutral position.
As suggested by Philips and Kinniry (1), a market-neutral strategy enables investors to reduce the exposure to systematic risk. This type of strategy typically involves both long and short positions in equity or fixed income instruments. The logic is straightforward – neutralize the portfolio’s beta through a combination of long and short positions in a stock and market index. As mentioned by Philips and Kinniry (2-3), the strategy helps improve risk-return characteristics of the portfolio. The proposed strategy is to invest in the stock of the Dow Jones index’ component, while shorting the index itself. Dow Jones Industrial Average comprises 30 stocks and trails the performance of large-sized companies from a variety of business sectors. The chosen stock is Boeing Corporation. It is a component of the index is believed to outpace the market because of political and economic factors. As mentioned by Investors (2017), the recent ISM manufacturing was extremely positive, while Boeing reported better than expected performance in 2016. In addition, the company is positioned to benefit from the expected tax cuts and overall support to the US manufacturing sector. Hence, Boeing is one of those companies that can outperform the market in the coming years. As suggested by Yahoo Finance (2017), the stock’s beta is 1.15. The current stock price is $161.65 per share. SPDR’s DIA is valued at $198.63 per ETF now. Therefore, to execute a market-neutral strategy it is important to short 1.15 share of DIA ETF per each Long share of Boeing’s stock. Suppose that the strategy involves buying 100,000 share of Boeing, so it is required to sell 115,000 DIA contracts. The total value invested in Boeing will be $16.165 million, while shorting of DIA will yield $22,842,450. The difference of $6.677,450 will be invested in risk-free Treasuries.
2). Videos.
The first video relates to interest rates and the reaction of institutional investors to higher rates. The key points are the following Collins (2017):
Michael Collins, who is an asset manager, suggests that pension funds and insurance companies are buying bonds right now to get higher returns from growing interest rates.
There is a divergence between stock and bond markets with equities reaching record highs while bonds declined.
It is a continuous relocation process at institutional and individual levels between stock and bond markets. Investors relocate money across different sectors, as market conditions change.
Inflation rate increase is expected to be restricted due to the lack of purchasing power that hurts businesses’ ability to raise prices.
Fundamentally corporate bonds are getting stronger with lower corporate risks and tighter spreads after the US Presidential elections.
Populists in Europe threaten to cause higher sovereign risks thereby increasing rates on the countries’ bonds.
In my opinion, the investing in bonds is most reasonable at the beginning of recession the end of the expansion cycle. At this period, the interest rates are relatively high and stock market is at or near its peak. Hence, the equities are more likely to fall, …
