Question #5
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 2
Status: Correct
Correct Answer: B
Question
A common strategy in bond portfolio management is enhanced indexing by matching primary risk factors. This strategy could be implemented by forming:
Answer Choices:
A. a portfolio with factor sensitivities that sum to one
B. a portfolio with factor sensitivities equal to that of the index
C. a portfolio with asset portfolio weights equal to that of the index
Explanation
Enhanced indexing by matching primary risk factors could be implemented by creating a
tracking portfolio with the same factor sensitivities as the index but with a different set of
bonds. Then any differences in performance between the portfolio and the benchmark
index will be the result of bond selection ability and not from different exposures to
macroeconomic factors like GDP, inflation, and interest rates.