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Suppose there are two risky assets, related to the same risk factor $f$.

$r_1 = μ_1 + β_1f$

$r_2 = μ_2 + β_2f$

There is also a risk free asset available at $r_f$

How do you eliminate factor risk in such market?

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  • $\begingroup$ You either need assets that have a negative correlation/beta to your factor. Else you need to have portfolios with negative weights to positive exposures, ie long/short portfolios. $\endgroup$ – demully Aug 29 at 7:09

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