medium · FRM Part 1 Foundations of Risk Management
According to APT, what happens to the pricing of a factor if it represents purely idiosyncratic risk?
- Its beta will always be 1.0 for all assets.
- Its risk premium (λ) must be zero in equilibrium.
- Its risk premium must be equal to the market risk premium.
- It will cause the R^2 of the model to reach 1.0.
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