Consistent Shares May Give Inconsistent Results?
Constant Dollar Hedging Strategy If you are like most investors, you probably have a number of shares you feel comfortable trading. For example, many investors think trading in 100 share lots limits the risk. On one hand that’s true since you are limited to $100 loss per $1 fall in the stock. On the other hand, it’s false. Here’s why: Say you purchase the following portfolio of six stocks shown with their performances after one year: Shares Purchase Price After one year: 100 $20 Up 20% 100 $18 Up 22% 100 $190 Down 18% 100 $45 Up 30% 100 $14 Up 25% 100 $22 Up 34% On the surface, it certainly looks impressive. There are five gainers and only one loser, and all of the gainers are up by a higher percentage than the loser. Would you be surprised to learn the overall portfolio is down? This is because the total dollars invested in each position are not equal. The largest amount of money placed in the gainers was $4,500 (100 shares at $45) while the one losing position had $19,000 invested (1
