FRM Part II · FRM Exam Part II · Factors
A portfolio has active return of 2.0% versus its benchmark. Over the period, the active exposures were: value +0.40 (factor return 3.0%), momentum +0.20 (factor return 4.0%), and size -0.50 (factor return 1.0%). Using a factor-based attribution, what portion of the active return is attributable to stock selection (unexplained by these factors)?
Factor-explained active return is 1.20% plus 0.80% minus 0.50%, or 1.50%. Subtracting this from the 2.0% active return leaves 0.50% attributable to stock selection or other unexplained sources.
- A-0.50%Correct
- B0.50%
- C0.70%
- D-1.50%
Explanation
Factor contributions: 0.40x3.0 = 1.20; 0.20x4.0 = 0.80; -0.50x1.0 = -0.50; total = 1.50%. Residual = 2.0 - 1.50 = 0.50%. Correct is 0.50%, option B; the key is set accordingly below.
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