FRM Part II · FRM Exam Part II · Factors
A portfolio has beta 1.2 to the market, 0.4 to a value factor and -0.3 to a momentum factor. Factor returns for the year were: market excess return 10%, value 3%, momentum 5%. The portfolio's excess return was 12.0%. Using the factor model, what was the alpha?
Factor-explained return is 12% from market plus 1.2% from value minus 1.5% from momentum, totaling 11.7%. Subtracting from the realized 12.0% excess return leaves alpha of 0.3%. The negative momentum loading reduces the explained return because momentum earned a positive premium.
- A0.3%Correct
- B1.5%
- C2.3%
- D-0.3%
Explanation
Factor-explained return = 1.2×10 + 0.4×3 + (-0.3)×5 = 12 + 1.2 - 1.5 = 11.7%. Alpha = 12.0 - 11.7 = 0.3%. Ignoring the negative sign on momentum gives 13.2, alpha -1.2; omitting the style factors gives 0%.
Did you get it right without looking?
One question tells you little. A timed set on Factors shows your real accuracy, how long you take and where you lose marks.
More Factors questions
- A stock has annualized volatility of 30%, the market has annualized volatility of 20%, and their correlation is 0.60. What is the stock's CA…
- An investor holds a long-only portfolio of low-volatility stocks and finds it earned returns similar to the market with much lower total vol…
- A fund runs a long-short factor portfolio with a 60% allocation to value and 40% to momentum. Each factor has annual volatility of 10%, and …
- A portfolio manager compares two approaches to explaining equity returns: the Fama-French model using portfolio-based factors such as SMB an…
- The risk-free rate is 3%, the expected market return is 9%, and a stock has a beta of 1.4. Using the CAPM, what is the stock's expected retu…
- Which statement best distinguishes macroeconomic factor models from fundamental (characteristic-based) factor models such as Fama-French?