A portfolio manager implements a 'low volatility' factor tilt by overweighting stocks that have historically exhibited smaller price fluctuations relative to the broader market. What is the most likely expected outcome of this tilt during a period of significant market downturn?

Question: A portfolio manager implements a 'low volatility' factor tilt by overweighting stocks that have historically exhibited smaller price fluctuations relative to the broader market. What is the most likely expected outcome of this tilt during a period of significant market downturn?

Answer options:

• Underperformance compared to the market average.
• Similar performance to the market average.
• Improved diversification but no change in downside protection. ✅ Relatively lower drawdowns and potentially better downside protection.

Correct answer: Relatively lower drawdowns and potentially better downside protection.

Explanation: The low volatility factor tilt seeks to invest in stocks that are less sensitive to market movements. During a market downturn, these stocks are typically expected to decline less aggressively than the overall market, thereby providing relatively lower drawdowns and improved downside protection for the portfolio.