how much should you be paid (in return) for taking the additional risk??The fact is, many asset pricing models will not price in risk that is felt to be easily gotten rid of.?What exactly does that mean??That means, that if I can offset risk in some way or another, I won't get rewarded for it.?We see this in diversification.?For example, Asset A may have a standard deviation which is large and pays 5%.?Asset B may have a similar standard deviation and expected return.?However, if we split our money and buy half A and half B, due to the interaction with each other, we actually will get the 5% expected return with a portfolio standard deviation that is less than what A or B had.?I believe the HW has a problem where you can see this happening.?
All of this said, what types of investment models are out there then??The fundamental one is called CAPM (Capital Asset Pricing Model) put forth by two different papers; sometimes called Sharpe/Lintner after the authors individual work.?Since then, there has been many others including the Arbitrage Pricing Model, and multifactor models.?Fama & French have had several papers on asset pricing models in the last 20 years.?With this knowledge, please fully answer one of the following (please choose something someone else has not taken)
- Fama/French have had several papers - what factors have they found to be important in asset pricing based on empirical evidence and/or intuitive theory?
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