FRM Part II · FRM Exam Part II · Factors
An investor wants a smart beta portfolio that harvests the low-volatility factor but is concerned about unintended bets. Which risk is most characteristic of an unconstrained minimum-volatility strategy?
An unconstrained minimum-volatility portfolio tends to concentrate in defensive, bond-like sectors, creating sector bets and sensitivity to rising rates. Its beta is below one and it carries meaningful tracking error against the cap-weighted index, so the other options are incorrect.
- AConcentration in defensive sectors and a sensitivity to rising interest ratesCorrect
- BA large negative exposure to the quality factor by construction
- CSystematically higher beta than the market
- DZero tracking error versus the cap-weighted index
Explanation
Low-volatility stocks cluster in utilities, staples and similar sectors that behave like bond proxies, so unconstrained portfolios take sector bets and interest-rate sensitivity. They have beta below one, usually a positive quality tilt, and material tracking error versus the cap-weighted index.
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