Over to our example. Now we're going to place positions in a portfolio, hedging market risk, sector risk, industry risk and balance sheet risk. So balance sheet risk, we need diversification. So we need at least more than one idea, ideally 10 to 20 ideas, depending on the size of your account, they get anything up to $100,000 is 10 positions is perfectly fine. I just start getting bigger, maybe you get to 200,000, increase that maybe to 12 positions and so on to get to half a million, maybe increase it to 1516 positions. And as you get closer to that million mark, you want to be looking at 20 positions.

So hedging market risk sector risk and industry risk, and of course, balance sheet risk, what are we going to do, we're going to be well diversified, and then we've got to go long, short, so it's a hedged bet. We're gonna buy a stock that we think is going to outperform and we're going to short these The market itself the sector, or intra industry, or an interest sector play. The example that we're going to give is Cirrus Logic long and short the Sox index, which is the semiconductors index. So we're assuming here that there's a portfolio of $100,000. So whoever's portfolio This is they've worked extremely hard for that hundred thousand dollars, you should be very careful with that money. So you want to hedge all of this risk, and you want to make a smooth curve on the upside.

So we've got to be long, short, 10 positions five long, five short, because we're mitigating most of the risk true spread trades long short, we can optimize and leverage so our assets under management are going to be about $200,000. We're going to put $100,000 in margin and then we're going to leverage up $100,000. So each long short trade remember these are pair trades, right? So for every long trade, there has to be another side to the trade which will be a short Gonna be $40,000 that's not going to be an even split of 2020 it's really going to depend on the beta. So as you can see here, as you guys know by now for tutorials, we have calculated beta against the s&p 500 for Cirrus Logic on the SOS index, and as you can see, what we have here is Cirrus Logic has a beta of 1.28.

And the index over a five year daily beta has 1.38 rights. As you can see, the actual index is a little bit more volatile than Cirrus Logic itself. So what we do is we allocate that 51% of capital to the lower volatility name, right, so we take our 40,000, multiply it by 51.82%, and that gives us our position size for Cirrus Logic. And inversely we do exactly the same. We take $40,000, multiply it by 48.18 and that gives our position size for the SOS index and this is going to be a short run. So we are likely going to lose money on this, but it's almost like an insurance policy.

So over here, we've got our portfolio and these templates are available within the course guys, you guys can download these and use them yourself. So essentially what we have here is Cirrus Logic, you'll build this up with a full portfolio whether it's five long, five short or 10, long, 10. Short, again, it depends on your portfolio account. How big is your portfolio, I think focusing on 10 positions, if you've got 100,000 or less is perfect. As you start to get bigger and bigger and bigger, you need to get more ideas into your portfolio. But you're also going to require a lot more time in order to go over 20 positions as opposed to 10.

It's double the work. So only increase it as you need it. For right now we're going to use an example of Cirrus Logic long, short SOS index. So this is just an example over a three four week period and we're going to fill this in here to show you guys how this works. All right, so thanks We bought it four weeks ago, and we bought it on the 22nd of November 2019. We bought it at $69 57 cents.

And our position size as you guys seen a moment ago, which is based on bita is 20,730. So slightly bigger than the x position, not sure, but that's based on the volatility of each asset. So the current price each week, we will update this will keep the price in there and it'll formulate what the return was for that week. And we'll copy and paste it in. So I've gone ahead and copied and paste each one in here. And as you can see above there, you actually have the formulas that I've I have here, paste it in there so you can see what the formula is.

So essentially, what we need to do now is we need to get the latest data so on Friday, we just finished the week, we need to take the closing price for that week for Cirrus Logic. So over to our portfolio and you'll see that I have all the price data here. The first column is Cirrus Logic. So if we go down to the bottom, I have a Friday date marked off in blue, as you can see, on the latest clothes on Friday was at 1.01. So what we do is key in here at 1.01. And that'll update to 16.44%.

And how we update this as we go equals, we take the total return since we put the position on, and we minus the sum of all of the positions all of the week's returns that we've seen so far. So the last three weeks, what that'll give us is 5.85% return in the past week, so just copy and paste that in 123, so the formula does not move. And then at the bottom here, you can see that it already automatically calculated what my returns are to be. So essentially, the returns how I'm calculating returns is very simple. I'm basically opening my brackets, I'm taking our position size that we started off with, and I'm adding the returns each week, and then I'm multiplying it by the percent change that we seen in week four. Which is 5.85%.

So we get a $1,345 return this week on a $20,000 position, not too bad. And then what we can see is the accumulative return for this position would be drag this across and make sure that factors in we just got to add this one here as well. The cumulative return on this position over a four week period is $3,619. Now, that's not clean. This is not a naked long position. We've got a short against that.

And the short that we have is the index itself, right? So we're taking out sector risk industry risk, we're taking out market risk, and we're reducing the volatility in our portfolio. So what we're going to do now is the exact same here for SOS. So back over here, you can see SOS closed at 1853 87 1853 point five, seven. And as you can see, we made a bigger loss here week on week. So again, what we do is we go equals the total return minus the sum of each return so far, these guys here, and I'll give us a weekly loss of 2.92%.

So Copy that, paste it in 123. And down below here, you can see that we lost $500 on this position, but we knew we were going to lose money on this position consistently. What it's doing is it's smoothing out the returns curve for us. So let's drag this across here. And what we want to do is make sure that this year is added in as well. So we'll add in the first one there as well.

So we've made it an accumulative loss on this position of 1644. But net net, we're doing just fine. So essentially what we've done is we've made a $3,600 gain minus AI loss. And we've made an average return of the long short spread of about 1.9% of our total portfolio. Now, if you think of that that might look small, however, you have to consider that there's going to be another four positions in here, this is one of five, so you could probably multiply that by five, and we'd be at 10%. After a four week period, in stocks here, while mitigating and large portions of risk on our goal would be maybe 20% 25, maybe even 30% per year.

Now, given that we're leveraged to x that could easily be 40 to 50% on the upside over time, so you can see how your portfolio can grow in a very risk adjusted manner. So from one position long, short, we've taken all the risk out of our portfolio and you can see the consistency in this right so you can see 34 basis points gain here on week 166 basis points on week 215 basis points on week three, and then 81 basis points. For now, if you can imagine some more other ideas are going to be losing money, others are going to be making more money. So net net, you should expect a very decent return over time, even though you're maxing out all of the risks within your portfolio. Now, as you can see, I've also added in here how we can build out our portfolio beat on our Sharpe ratio on this template.

So you guys know from the course exactly how to calculate beta now, you also know how to calculate your Sharpe ratio. And everything that you need for your portfolio is right on this template. All you got to do is update it each week. And as you can see, it's very consistent over time. So that's what we're aiming for is a smooth curve. And what's extremely important to recognize is that despite being diversified, despite having short positions, you know, are going to lose money in order to protect your upside.

The returns are still consistent, right? So it doesn't require a huge amount of time and you're looking for a smooth curve over time.