In developing an arbitrage portfolio, the factor sensitivity of the portfolio will
A) remain the same as before.
B) decrease slightly.
C) decrease the expected portfolio return.
D) increase significantly.

Question

Quizplus · Accepted Answer

In developing an arbitrage portfolio, the goal is often to exploit price differences without taking on a significant amount of risk. This means adjusting the portfolio to neutralize factor sensitivities as much as possible, rather than changing them significantly. Therefore, the factor sensitivity of the portfolio will remain the same as before, as the strategy aims to maintain a neutral exposure to various market factors while capturing arbitrage opportunities.

In Developing an Arbitrage Portfolio, the Factor Sensitivity of the Portfolio