Skip to content

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

A portfolio manager wants to exploit the low-risk anomaly by overweighting low-beta stocks within an equity universe. Which feature of the resulting long-only portfolio should the manager expect, compared with the cap-weighted benchmark?

A long-only low-beta portfolio will have a beta below one and a sector tilt toward defensive industries such as utilities and consumer staples, because low-beta stocks cluster there. The anomaly concerns returns being high relative to beta, not the portfolio beta being higher.

  1. AA beta below one and a tilt toward defensive sectors such as utilities and consumer staplesCorrect
  2. BA beta above one because low-beta stocks have higher expected returns
  3. CA beta equal to one because alpha offsets the lower risk
  4. DA tilt toward high-volatility growth stocks with small market capitalization

Explanation

Selecting low-beta stocks lowers the portfolio beta below one, and low-beta stocks are concentrated in defensive sectors such as utilities and staples. The anomaly claims such stocks earn returns similar to or above what CAPM implies, not that beta rises. Options B, C and D contradict the construction.

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