Because the expected return of asset a is identical to the, Financial Management

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Because the expected return of asset a is identical to the

Suppose that the return on risk free asset is 4% and there is only one factor that determines systematic risk in the economy. We have another asset A whose expected return is 4% and its factor loading is 0.02. Because the expected return of asset A is identical to the risk free asset, by law of one price, price of asset A must be identical to price of the risk free asset.

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