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Dumb Math Question
- Thread starter dcwriter2
- Start date
Ok, in a pairs trade, lets say ABC is trading at 100 and XYZ is a 90. Is the spread 10% (10/100) or 11% (10/90)?
not a dumb question. Normally I do it against the relevant benchmark. If it was a risk arbitrage deal I would say the spread is 11percent because that’s what I can earn. If it was a stock compared to the spx, I would say the stock is trading 10percent under the index.
Thanks. I think to describe a pairs trade, I'll stick to the number of points rather than a percentage and show them a chart.
You can do that too. there’s no wrong answer
I recommend building using beta spread instead of a price spread.
- Beta of Co A / Beta of Co B = spread
- $ value of trade in A * spread = $ value of trade in B
- $ value of trade in B / share price = units
What's is beta spread? Is beta excess returns in this example?I recommend building using beta spread instead of a price spread.
- Beta of Co A / Beta of Co B = spread
- $ value of trade in A * spread = $ value of trade in B
- $ value of trade in B / share price = units
No it's typically 1yr Daily adjusted beta.What's is beta spread? Is beta excess returns in this example?
What's is beta spread? Is beta excess returns in this example?
Lost me on this. If you have a sec, want to run an example? Thanks
ABC is 11.11% overpriced relative to the other security XYZ is 10% under-priced relative to the other security, of course comparing 2 stocks and saying that AMZN is overpriced relative to AAPl just because of a higher stock price is ridiculous you would have to measuring a ratio like P/E to make that judgement or a relative performance scale.