Skip to content

FRM Part II · FRM Exam Part II · Factor Theory

A risk manager reviews an equal-weighted smart beta equity index that rebalances quarterly. Compared with a cap-weighted index, which exposure is the manager most likely to find?

The manager will likely find an implicit small-cap tilt, higher turnover from rebalancing to equal weights, and lower capacity due to less liquid small stocks. Equal weighting overweights small companies relative to cap weighting, so it increases rather than removes size factor exposure.

  1. AA tilt toward large-cap stocks and lower turnover
  2. BA tilt toward smaller-cap stocks, with higher turnover and potentially lower capacityCorrect
  3. CNo size exposure because every stock has the same weight
  4. DLower exposure to the size factor because rebalancing sells winners

Explanation

Equal weighting gives small stocks far more weight than their market capitalization, creating an implicit size tilt. Rebalancing back to equal weights causes higher turnover, and illiquid small caps limit capacity. Equal weights are what create the size exposure.

Did you get it right without looking?

One question tells you little. A timed set on Factor Theory shows your real accuracy, how long you take and where you lose marks.

Practise Factor TheoryFree diagnostic mock

More Factor Theory questions