medium · FRM Part 2 Risk & Investment Management
According to factor theory, why does an asset that pays off during 'bad times' (such as a flight-to-quality instrument) typically earn a negative risk premium?
- Because it suffers from high transaction costs and severe illiquidity.
- Because it acts as insurance, providing value when marginal utility is high.
- Because its returns are perfectly correlated with the broad market index.
- Because it exhibits unusually high idiosyncratic volatility relative to the market.
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