FRM Part II · FRM Exam Part II · Factors
A portfolio manager ranks stocks by book-to-market ratio and buys the top tercile while shorting the bottom tercile, holding the position for a year. Which style factor is the manager targeting?
The manager is targeting the value factor. Buying stocks with high book-to-market ratios and shorting those with low ratios captures the premium for cheap stocks over expensive ones. The other factors sort on past returns, profitability, or return volatility instead of price relative to fundamentals.
- AValueCorrect
- BMomentum
- CQuality
- DLow volatility
Explanation
Sorting on book-to-market (or similar price-based ratios) and going long cheap stocks while shorting expensive stocks is the construction of the value factor. Momentum would sort on past returns, quality on profitability or earnings stability, and low volatility on past return risk.
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