Explanation:
Going long on both A and B is the correct strategy when the securities are negatively correlated. In the context of financial markets, correlation is a statistical measure that expresses the extent to which two securities move in relation to each other. A negative correlation implies that the securities move in opposite directions. If one security increases in value, the other security decreases in value, and vice versa. Therefore, by going long on both securities, the fund manager creates a hedged position.
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Q.2471 A fund manager wants to create a hedged position using two securities – A and B – and, upon further examination, it is observed that both the securities are negatively correlated. To create a hedged position, the manager must:
A
Short A and go long on B.
B
Long A and go short on B.
C
Go long on both A and B.
D
None of the above.
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