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Answer: The strategies tend to have significant alphas relative to standard market capitalization benchmarks.
A is correct. Low-risk strategies appear to have significant alpha relative to standard market capitalization benchmarks and sophisticated factor benchmarks that control for risk using dynamic value and momentum factors. This means that low volatility strategies have been observed to outperform the market on a risk-adjusted basis, providing higher returns than would be expected based on the level of risk taken. This outperformance is captured by the alpha, which is a measure of the excess return of a portfolio relative to the return of a benchmark index. The alpha is significant when compared to standard market capitalization benchmarks, which are typically broad market indices that represent the average performance of a market segment. Additionally, the alpha is significant when compared to more sophisticated factor benchmarks that incorporate dynamic factors such as value and momentum, which are used to explain the returns of securities beyond the market risk. This suggests that low volatility strategies can provide attractive returns while also managing risk effectively.
Author: LeetQuiz Editorial Team
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During a presentation on investment strategies aimed at newly-hired portfolio analysts, which of the following statements would accurately describe low volatility strategies that a portfolio manager at a pension fund should highlight?
A
The strategies tend to have significant alphas relative to standard market capitalization benchmarks.
B
The strategies tend to have negative alphas relative to dynamic factors such as value or momentum.
C
The strategies tend to generate high alphas over the risk-free rate but negligible alphas over any other benchmark.
D
The strategies tend to generate low alphas if the benchmark used is adjusted for risk and high alphas otherwise.