Hi, hedge ratio is obtained from a regression of stockA and stockB. If hedge ratio=0.67, stockA=$1000, and stockB=$1500, what are the numbers of stockA and stockB I should long and short with minimum capital? it is too costly to long 100 stockA and short 67 stockB. are there any alternatives?
Hi Bill,
You can go for the approximation if it is costly. For example, you can look at going long on 10 shares of stock A and short (6.7 round off) 7 shares of stock B. Certain brokers might allow fractional ownership as well.
Hope this helps.