FRM Part II · FRM Exam Part II · Factors
A quant team defines a quality factor. Which characteristic set is most consistent with a typical quality definition in factor investing?
A typical quality factor favours firms with high profitability, stable earnings and low leverage. Value uses cheapness ratios, momentum uses past returns, and size uses market capitalisation, so only the profitability, stability and low-leverage combination describes quality.
- AHigh profitability, stable earnings and low leverageCorrect
- BLow price-to-book and high dividend yield only
- CStrong past 12-month return and rising analyst revisions only
- DSmall market capitalisation and low trading volume
Explanation
Quality is generally measured by profitability (e.g., ROE, gross margins), earnings stability and low leverage or strong balance sheets. The other options describe value, momentum and size or liquidity characteristics.
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