{"id":40883963,"date":"2021-12-11T11:03:11","date_gmt":"2021-12-11T05:33:11","guid":{"rendered":"https:\/\/stockviz.biz\/index.php\/?p=40883963"},"modified":"2023-03-16T10:15:34","modified_gmt":"2023-03-16T04:45:34","slug":"beta-vs-hamming","status":"publish","type":"post","link":"https:\/\/stockviz.biz\/index.php\/2021\/12\/11\/beta-vs-hamming\/","title":{"rendered":"Beta vs. Hamming"},"content":{"rendered":"\n<p>The beta of a portfolio is often used to hedge it against the market. We did a brief intro in our post: <a rel=\"noreferrer noopener\" href=\"https:\/\/stockviz.biz\/2021\/05\/23\/a-gentle-introduction-to-hedging\/\" target=\"_blank\">A Gentle Introduction to Hedging<\/a>. And previously, we discussed how the <a rel=\"noreferrer noopener\" href=\"https:\/\/stockviz.biz\/2021\/11\/27\/hamming-distance\/\" target=\"_blank\">Hamming distance<\/a> can unearth relationships by simplifying the data that we have. Here, we bring the two concepts together.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Linear-payoffs<\/h2>\n\n\n\n<p>CAPM Beta is a glorified linear regression between two return streams. It is useful in the context of linear-payoff portfolios. <\/p>\n\n\n\n<p>For example, a typical long-only fund can use its portfolio beta to measure sensitivity to the market and to hedge against it. A single-stock portfolio with only HDFC in it will exhibit varying beta wrt different markets.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/beta-hamming\/HDFC-beta.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>If you are after a linear-payoff (long stocks or futures outright,) beta can be a useful metric to track.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Convex-payoffs<\/h2>\n\n\n\n<p>Betas are useless if you are trying to hedge or analyze a portfolio with convex payoffs. Like, say, an options portfolio. Here, you care more about up\/down days over an index. This is where Hamming distances are useful.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img decoding=\"async\" src=\"https:\/\/raw.githubusercontent.com\/stockviz\/blog\/master\/beta-hamming\/HDFC-hamming.png\" alt=\"\" \/><\/figure>\n\n\n\n<p>A Hamming distance of 70 over a 250-day return stream means that by flipping the direction of just a third of the sample, the up\/down series will equalize.<\/p>\n\n\n\n<p>In our HDFC-only single-stock portfolio example above, we see that its beta over NIFTY\/BANK-NIFTY is vastly different whereas its Hamming distances closely track each other. This behavior can be used to construct trades that go beyond being long-only equity.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The beta of a portfolio is often used to hedge it against the market. We did a brief intro in our post: A Gentle Introduction to Hedging. And previously, we discussed how the Hamming distance can unearth relationships by simplifying the data that we have. Here, we bring the two concepts together. Linear-payoffs CAPM Beta &hellip; <\/p>\n","protected":false},"author":2,"featured_media":2106273,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3471],"tags":[2761],"class_list":["post-40883963","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing-insight","tag-quant","entry"],"_links":{"self":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/40883963","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/comments?post=40883963"}],"version-history":[{"count":0,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/posts\/40883963\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media\/2106273"}],"wp:attachment":[{"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/media?parent=40883963"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/categories?post=40883963"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stockviz.biz\/index.php\/wp-json\/wp\/v2\/tags?post=40883963"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}