Skip to content

FRM Part II · FRM Exam Part II · Factor Theory

In a Brinson-style or factor-based attribution, a manager's active return is 2.0%. Factor tilts explain 1.4% of this, and the remainder is stock selection. Which conclusion is most appropriate?

Stock selection contributed 0.6% (2.0% minus 1.4%), while 70% of the active return came from factor tilts. Because factor exposures can be replicated cheaply, only the 0.6% is genuine manager alpha.

  1. AStock selection contributed 0.6% of the active return, and 70% of the outperformance came from factor tilts that could be replicated cheaplyCorrect
  2. BStock selection contributed 1.4% and factor tilts 0.6%
  3. CThe manager generated 2.0% of pure alpha
  4. DFactor tilts contributed 0.6%, so the manager has strong skill

Explanation

Residual = 2.0% - 1.4% = 0.6% from selection. Factor share = 1.4/2.0 = 70%. Such factor returns are obtainable via low-cost factor products, so true alpha is only 0.6%.

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