Nicole Seaman

Director of FRM Operations
Staff member
Learning objectives: Assess methods of mitigating volatility risk in a portfolio and describe challenges that arise when managing volatility risk. Explain how dynamic risk factors can be used in a multifactor model of asset returns, using the Fama French model as an example. Compare value and momentum investment strategies, including their risk and return profiles.


20.4.1. According to Ang, which of the following is TRUE about a rebalancing strategy in equity markets?

a. Rebalancing is equivalent to diversification
b. Rebalancing gets beat by buy-and-hold because buy-and-hold is the best strategy; i.e., is optimal for a long-horizon investor
c. Rebalancing is a short volatility strategy that earns the volatility risk premium
d. Rebalancing is a long volatility strategy that pays the volatility risk premium but benefits under a regime change

20.4.2. Ang analyzed the historical performance of several macroeconomic (aka, fundamental) factors and style (aka, investment) factors. Style factors include value, momentum, and size. According to Ang's analysis, which of the following is TRUE about style factors?

a. Style factors do not persist because eventually, investors discover the factor
b. Investing in the momentum is the most profitable strategy among all style factors but momentum strategies exhibit negative skew
c. The opposite of a momentum strategy is portfolio rebalancing; i.e., an investor who rebalances cannot invest in the moment factor by definition
d. The opposite of a momentum strategy is a value strategy; i.e., a factor model with both value and momentum contradicts itself or at least suffers from perfect multilcolliinearity

20.4.3. According to Ang, which of the following statements is TRUE about volatility risk?

a. Expected returns increase with higher volatility risk
b. Expected returns decrease with higher volatility risk
c. Volatility is a measure of risk (or property of an asset) but volatility itself is not a factor because it cannot be traded
d. The average investor's risk aversion is time-varying such that expected returns can increase or decrease with higher volatility risk

Answers here: