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Lecture 38

Why You Should Hedge Beta and Sector Exposures (Part I)

Introduction

Independent bets are a key facet of any successful investment strategy. They herald diversification and, through modern portfolio theory, allow us to reduce variance and raise the Sharpe ratio of a portfolio. The more independent bets you make with the same end goal in mind, the more likely you are to reach that end goal on average. In this lecture, we explore the importance of hedging out common factor risk and how it can affect the quality of the so-called independent bets that you make.

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