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True or False? Explain. Suppose arbitrage pricing theory holds, so returns of all assets are determined by their factor loadings on a small set of
True or False? Explain.
Suppose arbitrage pricing theory holds, so returns of all assets are determined by their factor loadings on a small set of priced risk factors. The risk-free rate is rf. Suppose two stocks, A and B, are perfectly positively correlated. Both stocks are risky: the return standard deviation of both is greater than 0. If stock A has an expected return greater than the risk-free rate rf, then stock B must also have an expected return greater than rf.
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