FRM Part II · FRM Exam Part II · Factor Theory
A portfolio manager at a pension fund reviews a long-only equity strategy that systematically overweights stocks with low price-to-book ratios and high free cash flow yields relative to the market. Which style factor is this strategy primarily exposed to?
The strategy is exposed to the value factor, because it tilts toward stocks that are cheap relative to fundamentals, such as low price-to-book and high free cash flow yield. Momentum, size and low volatility use different sorting variables.
- AValueCorrect
- BMomentum
- CSize
- DLow volatility
Explanation
Low price-to-book and high cash flow yield are classic valuation measures that define the value factor, which buys cheap stocks relative to fundamentals. Momentum relies on past returns, size on market capitalization, and low volatility on past return variability, none of which are the selection criteria here.
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