Hi guys i really hope you can help as i've been pulling out my hair for days on this!!
OK so basically i understand the dollar neutral ratio, simply stocka/stockb = dollar neutral ratio. Works great because i can chart it and do a daily p/l update and it perfectly tracks the p/l of my whole long short position.
My questions is how do i get the ratio when the spread is weighted differently due to differing beta values? For example stocka is very volatile and stockb is not. So i will for arguments sake weight 80% of my capital on stocka and 20% of my capital on stock.
Now to get my ratio i can not simply divide stocka by stockb as i did before because i get the same daily p/l swings as i do with dollar neutral.
So guys how do i get a beta hedged ratio which i can chart and also track a daily p/l which perfectly represents my whole long short position.
