FRM Part II · FRM Exam Part II · Factors
A portfolio manager builds a long-short equity strategy that buys stocks with low price-to-book ratios and sells stocks with high price-to-book ratios. Which style factor is the manager primarily targeting?
The manager is targeting the value factor. Buying stocks with low price-to-book ratios and shorting those with high ratios is the classic value construction, which captures the return premium of cheap stocks over expensive ones, unlike momentum, quality or low volatility, which rank on other characteristics.
- AValueCorrect
- BMomentum
- CQuality
- DLow volatility
Explanation
Ranking stocks by price-to-book and buying cheap names while shorting expensive ones is the standard construction of the value factor. Momentum ranks on past returns, quality on profitability and balance sheet strength, and low volatility on past return variability.
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