Question #15
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 7
Status: Correct
Correct Answer: A
Question
A tracking portfolio is a portfolio with:
Answer Choices:
A. factor sensitivities of zero to all factors, positive expected net cash flow, and an initial investment of zero
B. a factor sensitivity of one to a particular factor in a multi-factor model and zero to all other factors
C. a specific set of factor sensitivities designed to replicate the factor exposures of a benchmark index
Explanation
A tracking portfolio is a portfolio with a specific set of factor sensitivities designed to
replicate the factor exposures of a benchmark index. 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.