FRM Part II · FRM Exam Part II · Factors
Which description best matches the quality factor as used in equity factor investing?
The quality factor favors firms with high profitability, stable earnings and low leverage, meaning strong and resilient fundamentals. It differs from momentum, which uses past returns, size, which uses market capitalization, and value, which uses low price multiples.
- AFavoring firms with high profitability, stable earnings and low leverageCorrect
- BFavoring firms with the highest recent price appreciation
- CFavoring firms with the smallest market capitalization
- DFavoring firms with the lowest price-to-earnings ratios
Explanation
Quality screens typically use high profitability (such as return on equity or gross profit to assets), earnings stability and low leverage. Recent price appreciation is momentum, small capitalization is size, and low price multiples are value.
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