Question #24
Reading: Reading 36 Using Multifactor Models
PDF File: Reading 36 Using Multifactor Models.pdf
Page: 11
Status: Correct
Correct Answer: A
Question
A portfolio with a specific set of factor sensitivities designed to replicate the factor exposures of a benchmark index is called a:
Answer Choices:
A. tracking portfolio
B. factor portfolio
C. arbitrage portfolio
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.