Chartered Financial Analyst Level 2

Explanation

Long/short equity managers primarily generate alpha through stock selection rather than beta tilts or market timing.

Key Points:

• Stock Selection (C): This is the core skill where managers identify mispriced securities - going long on undervalued stocks and shorting overvalued stocks to capture the price convergence.
• Beta Tilts (A): While managers may have some market exposure, alpha generation specifically comes from security selection skill, not systematic market risk exposure.
• Market Timing (B): Long/short strategies focus more on relative value between securities rather than timing overall market movements.

Why Stock Selection is Primary:

• The fundamental premise of long/short equity is that managers can identify securities that will outperform or underperform their peers
• Alpha represents the excess return above what would be expected given the portfolio's risk exposure
• This excess return comes from the manager's ability to pick winners and avoid losers through fundamental analysis, quantitative models, or other selection methodologies

Therefore, the correct answer is C - stock selection.