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How Exposed Are You? A Brief Lesson In Exposure! 0 comments
Exposure in investing is not the type of exposure that Lindsey Lohan, Paris Hilton or Kim Kardashian might seek out. Although to us in the investment field it is just as exciting or maybe more so than the everyday overthetop antics of this group and others like them!
(click to enlarge)
My definition of market exposure in financial terms is the proportion of money invested and subject to market risk.
In general there are two basics types of exposure: Gross and Net.
Now here is where the confusion starts for many and it is what I hope to clear up today!
Gross exposure is defined as the total investment dollars invested as a percentage of your total portfolio in dollars. Yes, this could be total investment Yen invested as a percentage of total portfolio dollars in Yen? It can apply to any currency.
So let's do a few basic examples"
Example 1You have a portfolio valued at $100,000 (U.S.) and you invest $80,000 in 4 ETFs.
So $80,000 divided $100,000 equals 80%. So your market exposure is 80% gross long.
Example 2You again have a portfolio valued at $100,000 (U.S.) and you invest using margin in equities with value of $120,000 (U.S.).
So $120,000 divided $100,000 equals 120%. So your market exposure is 120% gross long in this case.
Now that is gross exposure. There is also net exposure.
My definition of net exposure is that it is gross long exposure minus gross short exposure.
So again here are few examples:
Example 3You have a portfolio that is valued at $100,000 (U.S.) and you invest 75% in a long portfolio of ETFs and you invest 25% in an inverse ETF.
So you have $75,000 gross long and $25,000 gross short, your net exposure is $50,000 or 50% ($50,000 / $100,000).
Your gross exposure is $100,000 or 100%.
Confused…let's try another one.
Example 4You have a portfolio that is valued at $100,000 (U.S.) and you invest 120% in a long portfolio of ETFs and you invest 30% in short portfolio of stocks.
So you have $120,000 gross long and $30,000 gross short, your net exposure is $90,000 or 90% ($90,000 / $100,000).
Your gross exposure is $150,000 or 150%.
So there you have it. The next time we tell you that our equal weight sample portfolio is 100% invested on a gross basis all the time, but is currently on 50% invested on a net basis. You will know exactly what we mean.
By the way, example 3 is our current exposure in the equal weight portfolio. As I write this markets are off big and I am thankful to only have net exposure of 50%, 37% on a beta basis (more on that later).
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