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Explain whats wrong with the following logic to construct multifactor asset pricing models. Start with a simple asset pricing model, e.g. CAPM. Consider which patterns
Explain whats wrong with the following logic to construct multifactor asset pricing models. Start with a simple asset pricing model, e.g. CAPM. Consider which patterns are explained by it and which are left unexplained. If some firm characteristic X is unexplained, construct and include a new factor on the basis of this characteristic. By definition your new model (with new factor would explain X).Repeat steps until all/most important anomalies are accounted for
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