Question #12
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 6
Status: Incorrect
Correct Answer: A
Your Answer: A
Question
A portfolio with a factor sensitivity of one to a particular factor in a multi-factor model and zero to all other factors is called a(n):
Answer Choices:
A. arbitrage portfolio
B. tracking portfolio
C. factor portfolio
Explanation
A factor portfolio is a portfolio with a factor sensitivity of one to a particular factor and
zero to all other factors. An arbitrage portfolio is a portfolio with factor sensitivities of zero
to all factors, positive expected net cash flow, and an initial investment of zero. A tracking
portfolio is a portfolio with a specific set of factor sensitivities designed to replicate the
factor exposures of a benchmark index.