A portfolio manager for a pension fund is evaluating whether to implement a momentum factor tilt within their Canadian equity allocation. The fund's primary objective is to achieve long-term growth while managing downside risk. What potential drawback of a momentum strategy should the manager consider carefully in this context?

Question: A portfolio manager for a pension fund is evaluating whether to implement a momentum factor tilt within their Canadian equity allocation. The fund's primary objective is to achieve long-term growth while managing downside risk. What potential drawback of a momentum strategy should the manager consider carefully in this context?

Answer options:

• Momentum is generally considered a defensive factor.
• Momentum strategies tend to have lower turnover and trading costs. ✅ Momentum factors can experience sharp reversals and high volatility.
• Momentum typically offers diversification benefits during periods of market stress.

Correct answer: Momentum factors can experience sharp reversals and high volatility.

Explanation: Momentum strategies, by definition, invest in assets that have performed well recently. While potentially rewarding, they are known for experiencing sharp reversals when market trends shift, leading to higher volatility and potential drawdowns, which is a key consideration for managing downside risk.