FRM Part II · FRM Exam Part II · Portfolio Construction
Which feature most clearly distinguishes a long-short factor portfolio from a long-only smart beta implementation of the same factor?
A dollar-neutral long-short factor portfolio can isolate the factor premium with little market exposure, because longs and shorts offset market beta. Long-only smart beta retains market beta and captures the factor less purely, and both approaches face transaction costs.
- AThe long-short portfolio is dollar-neutral and can isolate the factor premium with little market exposureCorrect
- BThe long-only portfolio always has higher factor exposure
- CThe long-short portfolio cannot be affected by transaction costs
- DThe long-only portfolio has no exposure to the market factor
Explanation
A dollar-neutral long-short portfolio nets out market beta and isolates the factor premium, though it incurs shorting costs and leverage. Long-only versions retain market beta and typically capture the factor less purely. Transaction costs affect both.
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