easy · 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 illiquidity.
- Because it acts as insurance, providing value when marginal utility is high.
- Because its returns are perfectly correlated with the market index.
- Because it has high idiosyncratic volatility.
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