Priced Risk Factors

Schweser - Port Concepts - Pg233 Priced Risk Factors - “By ‘priced’ we mean investor cannot expect to be rewarded for being exposed to that type of risk.” Did the coffee not brew well to give-in the needed effect or should it read Priced Risk Factors - “By ‘priced’ we mean investor __CAN__ expect to be rewarded for being exposed to that type of risk.”

my thoughts are that if you “price” a risk factor, then you would expect to be rewarded with a higher return. how can you expect a higher return from a risk factor that you cannot price? it’s gotta be wrong i think

Thx for confirming MS.

swaption, MS read that sentence in the context. they seem to be saying it in the context of the “Unsystematic risk factors”. In that case - it CANNOT be priced away be the market. (The first two sentences are in the context of unsystematic risk factors that can be diversified away in a portfolio. so it is just badly written text. should have been written instead as Priced Risk factors are those for which investors are willing to demand compensation. Unsystematic factors are risk factors that affect many assets - these can usually be diversified away in a portfolio. Investors cannot expect to be rewarded for being exposed to these types of risk. Examples in our factor model - GDP and Credit quality spread shocks are systematic risk factors - which means they can affect even well diversified portfolios. Since these cannot be avoided - these factors represent priced risk - risk for which investors demand compensation.

dammm… yea! I just reread and the context was ‘Unsystematic risk factors’ for which the investor gets no reward. Thx cpk!

that makes sense, i dont have schweser so i was going with swaption’s quote

they have posted a correction to this on the Schweser Errata today: Page: 233 - Correction Unsystematic factors are risk factors that do not affect many assets simultaneously, and these can usually be diversified away in a portfolio. Investors cannot expect to be rewarded for being exposed to these types of risk, so they are not priced. Priced Risk factors are those for which investors demand compensation. The examples in our factor model, GDP and credit quality spread shocks, are systematic risk factors. This means they can affect even well diversified portfolios. Since these cannot be avoided, they are priced risk for which investors demand compensation. ( Posted: 2009-03-05)

Yea - So schweser technical team does read our forum!

I had sent them an erratum item as well.

Now I also wonder if you are Peter Orlinto? - btw, how’s the deal with Schweser going?