Can someone give an example or show the equation to these? Thanks A factor portfolio is a portfolio with a factor sensitivity of one to a particular factor and zero to all other factors. An arbitrage portfolio is a portfolio with factor sensitivities of zero to all factors, positive expected net cash flow, and an initial investment of zero. A tracking portfolio is a portfolio with a specific set of factor sensitivities designed to replicate the factor exposures of a benchmark index
A pure Factor Portfolio is a portfolio with a factor sensitivity of ONE to a particular factor and 0 to all other factors. Schweser states you can use a factor portfolio to speculate or hedge. So if you think that GDP is going to tank, then short a pure factor portfolio with a sensitivity of 1 to GDP. Cannot explain arbitrage portfolio in terms of factor sensitivities. I can tell you that it’s risk-free (maybe that’s why it has ZERO factor sensitivities - someone confirm this) A tracking portfolio is sort of like an index fund, but doesn’t necessarily have to have the same weightings (active specific risk). So a an investment manager can claim that it has the same factor sensitivities as the S&P500 but accomplishes this by superior asset selection.