factor model problem

[maratikus]

A portfolio manager uses a two-factor model to manage her portfolio. The two factors are confidence risk and time-horizon risk. If she wants to bet on an unexpected increase in the confidence risk factor (which has a positive risk premium), but hedge away her exposure to time-horizon risk (which has a negative risk premium), she should create a portfolio with a sensitivity of:
A) -1.0 to the confidence risk factor and 1.0 to the time-horizon factor.
B) -1.0 to the confidence risk factor and 0.0 to the time-horizon factor.
C) 1.0 to the confidence risk factor and 0.0 to the time-horizon factor.
D) 1.0 to the confidence risk factor and -1.0 to the time-horizon factor.

 

[Niblita75]

C
A zero factor means she has no exposure.

 

[plyon]

C
Just answered this one from the Q Bank this morning!

 

[chadtap]

Agreee with C

 

[mwvt9]

C.
Zero times the factor will yield no exposure to the factor.

 

[maratikus]

good job, guys! I will be betting on you in June!

 

[isabellano9]

what I don’t get about this question is : if I want to hedge something it’s because I have something is it not ? that’s what I don’t understand… of course if I don’t want any time horizon exposure I go for 0 but is it the language that’s confusing me or did I oversee something?

 

[krokodilizm]

Yes you hedge around something that you have, but you can have two objectives; either to prevent your dog from running away or to deflect hoardes of unwanted zombies.