What dos it mean when they say none of the asset returns are completely determined by the factors… Dont we want the model to explain returns fully?
Magician, pl help…
Ideally, yes.
They’re not saying that we don’t want this to happen.
What they’re saying is that if it doesn’t happen, then we know that we avoid one mistake: creating a risky portfolio that appears (in our model) to be risk-free.
If the returns of our assets are all explained fully by the factors we choose, then it’s possible that we’ll create a risky portfolio that appears (in our model) to be risk-free.
ok…thanks sir…
My pleasure.