FRM Part II · FRM Exam Part II · Factors
A risk manager builds a long-only factor portfolio by selecting the top quintile of stocks ranked on a single value score and holding them in equal weights. Compared with a long-short factor portfolio based on the same score, which is the most likely consequence?
A long-only top-quintile portfolio holds mostly market beta, so only part of its risk comes from the factor itself. It cannot capture the short-leg premium. A long-short portfolio is closer to market neutral and delivers purer factor exposure per unit of risk.
- AThe long-only portfolio will carry substantial market beta and a smaller pure factor exposure per unit of riskCorrect
- BThe long-only portfolio will have zero market beta
- CThe long-only portfolio will capture the short-leg premium in full
- DThe long-only portfolio will have higher factor purity because it is unconstrained
Explanation
A long-only portfolio holds stocks that are positively exposed to the market, so beta is near one. The factor premium is only partly captured because the short leg is absent, and the factor return is diluted by market risk. The long-short construct is closer to market-neutral.
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