130-30 Strategy

AAA

DEFINITION of '130-30 Strategy'

A strategy that uses financial leverage by shorting poor performing stocks and purchasing shares that are expected to have high returns. A 130-30 ratio implies shorting stocks up to 30% of the portfolio value and then using the funds to take a long position in the stocks the investor feels will outperform the market. Often, investors will mimic an index such as the S&P 500 when choosing stocks for this strategy.

INVESTOPEDIA EXPLAINS '130-30 Strategy'

To engage in a 130-30 strategy, an investment manager could rank the stocks used in the S&P 500 from best to worse on expected return, as signaled by past performance. From the best ranking stocks, the manager would invest 100% of the portfolio's value and short sell the bottom ranking stocks, up to 30% of the portfolio's value. The cash earned from the short sales would be reinvested into top-ranking stocks, allowing for greater diversification in the higher ranks.

RELATED TERMS
  1. Short Selling

    The sale of a security that is not owned by the seller, or that ...
  2. 90/10 Strategy

    An investing strategy that involves deploying 90% of one's investment ...
  3. Expected Return

    The amount one would anticipate receiving on an investment that ...
  4. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  5. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  6. Standard & Poor's 500 Index - S&P ...

    An index of 500 stocks chosen for market size, liquidity and ...
Related Articles
  1. 6 Asset Allocation Strategies That Work
    Options & Futures

    6 Asset Allocation Strategies That Work

  2. When To Short A Stock
    Active Trading Fundamentals

    When To Short A Stock

  3. 5 Things To Know About Asset Allocation
    Investing Basics

    5 Things To Know About Asset Allocation

  4. Backtesting: Interpreting The Past
    Trading Systems & Software

    Backtesting: Interpreting The Past

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center