Skip to content

FRM Part II · FRM Exam Part II · Alpha (and the Low-Risk Anomaly)

A portfolio manager at an asset management firm wants to exploit the low-risk anomaly in equities using a long-only mandate benchmarked to a cap-weighted index. Which implementation approach is most consistent with the anomaly as described in the Alpha (and the Low-Risk Anomaly) reading?

The manager should overweight low-beta and low-volatility stocks and underweight high-beta stocks versus the benchmark. The anomaly is that low-risk stocks have delivered better risk-adjusted returns than CAPM predicts, so tilting toward them captures it within a long-only mandate.

  1. AOverweight low-beta and low-volatility stocks and underweight high-beta stocks relative to the benchmarkCorrect
  2. BOverweight high-beta stocks because they carry the highest expected return under CAPM
  3. CHold the benchmark weights but add leverage to raise expected return
  4. DConcentrate in the stocks with the largest market capitalization

Explanation

The low-risk anomaly says low-beta and low-volatility stocks have earned higher risk-adjusted returns than high-beta stocks. A long-only investor exploits it by tilting toward low-risk stocks and away from high-risk ones. Overweighting high beta does the opposite, and leverage on the benchmark does not use the anomaly.

Did you get it right without looking?

One question tells you little. A timed set on Alpha (and the Low-Risk Anomaly) shows your real accuracy, how long you take and where you lose marks.

Practise Alpha (and the Low-Risk Anomaly)Free diagnostic mock

More Alpha (and the Low-Risk Anomaly) questions