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Math Help - Leverage

  1. #1
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    Exclamation Leverage

    This question may sound simple, but I'm not sure about this and would like to ask for your help...

    Suppose that portfolio has 1000 dollars in cash and is long 1000 shares of JPM with the price $42 and long 500 shares of MSFT at $33.50. What is the gross and net leverage of portfolio?

    Thanks.
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  2. #2
    GAMMA Mathematics
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    Quote Originally Posted by bluesilver View Post
    This question may sound simple, but I'm not sure about this and would like to ask for your help...

    Suppose that portfolio has 1000 dollars in cash and is long 1000 shares of JPM with the price $42 and long 500 shares of MSFT at $33.50. What is the gross and net leverage of portfolio?

    Thanks.
    Is leverage (longs + shorts) / portfolio equity?
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  3. #3
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    On the Internet I found that
    gross leverage = (longs + absolute value of shorts)/portfolio equity

    net leverage = (longs + shorts)/portfolio equity

    Since longs is 42*1000+33.50*500 = 58750, I think that gross leverage and net leverage are the same: 58750/(58750+10000) = 0.85.

    What do you think?

    P.S.: There is a typo in my first post: cash is actually $10,000, not $1,000.
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  4. #4
    GAMMA Mathematics
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    Quote Originally Posted by bluesilver View Post
    On the Internet I found that
    gross leverage = (longs + absolute value of shorts)/portfolio equity

    net leverage = (longs + shorts)/portfolio equity

    Since longs is 42*1000+33.50*500 = 58750, I think that gross leverage and net leverage are the same: 58750/(58750+10000) = 0.85.

    What do you think?

    P.S.: There is a typo in my first post: cash is actually $10,000, not $1,000.
    Okay, I completely agree with you. There is nothing being short sold in this portfolio, so gross = net leverage.
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  5. #5
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    Thanks. By the way, is my interpretation of portfolio equity right? (In my last post I calculated it as longs + cash = 58750+10000.) I'm just new in this subject and would like to double-check.
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  6. #6
    GAMMA Mathematics
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    Quote Originally Posted by bluesilver View Post
    Thanks. By the way, is my interpretation of portfolio equity right? (In my last post I calculated it as longs + cash = 58750+10000.) I'm just new in this subject and would like to double-check.
    You can think of your portfolio as assets minus liabilities. Assets equals anything you are long in plus cash. Liabilities is anything you are short in, so you are correct!
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  7. #7
    mikhail_s
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    Bluesilver,

    Please note that your homeworks are supposed to be done individually.
    That means with the help from you notes in class and individual research.
    Discussion boards does not count as individual research.

    Mikhail
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