Weigh the risks, costs and alpha potential of long-only, long extension, equitized market-neutral and long/short equity portfolio structures
The idea
Long-only portfolios are simple, cheap and have high capacity, but a stock can be underweighted only to zero, so negative views on small benchmark constituents barely register. Long extension (for example 130/30) shorts 30% of capital and adds 30% to longs, keeping net exposure at 100% and beta near one while relaxing that constraint, at the cost of borrowing fees, margin and short-squeeze risk. A market-neutral long/short portfolio removes market beta, so its return is the spread between longs and shorts plus interest on cash; equitising it with index futures adds back market exposure. More shorting raises potential alpha but also leverage, complexity and cost. The trap is forgetting that shorts carry theoretically unlimited losses and can be recalled.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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