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Weighted Price Ratio

While a simple price ratio works for one long vs. one short, traders often use baskets of assets: multiple longs and multiple shorts with different weightings. The Weighted Ratio generalizes the idea of the price ratio into a combined performance measure for the entire strategy.

Weighted Ratio=∏i=1nPriceiwi\text{Weighted Ratio} = \prod_{i=1}^{n} \text{Price}_i^{w_i}

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How It Works

Each asset price is raised to the power of its allocation weight:

  • Long positions have positive weights

  • Short positions have negative weights

So, for the example portfolio:

  • 50% Long $HYPE

  • 25% Short $ASTER

  • 25% Short $XPL (Plasma)

The weighted ratio becomes:

Weighted Ratio=HYPEUSD0.5⋅ASTERUSD−0.25⋅XPLUSD−0.25\text{Weighted Ratio} = \text{HYPEUSD}^{0.5} \cdot \text{ASTERUSD}^{-0.25} \cdot \text{XPLUSD}^{-0.25}

This is effectively the geometric return of the portfolio — a mathematically clean way to encode long/short performance.

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What It Tells You

The absolute value of the ratio at any moment isn’t very important. What is important is how it changes over time:

  • If the weighted ratio trends upward, your basket is performing well:

    • longs are winning

    • shorts are losing

    • or both

  • If it trends downward, the basket is underperforming.

This makes the weighted ratio a direct measure of strategy PnL momentum.

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Example Interpretation

Using the example:

✔ Long HYPE / Short ASTER + PLASMA → the ratio chart trends up ✘ Long ASTER + PLASMA / Short HYPE → the ratio chart trends down

This immediately tells you:

  • HYPE has been outperforming the other two

  • The long-HYPE short-basket trade is the winning side

  • Reversing the structure creates a losing setup

No need to measure each asset individually — the ratio chart shows everything.

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Why Weighted Ratios Matter

  • They represent the actual combined PnL path of a long/short strategy.

  • They help you evaluate whether a basket approach is trending or reverting.

  • They allow fair comparison between completely different strategy weights.

  • They reveal whether a multi-asset hedged trade has directional bias or is neutral.

Weighted ratios are widely used in quant trading, risk parity strategies, and factor investing.

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