# Eliminating factor risk?

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?

• 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. – demully Aug 29 at 7:09