Question

If we add more factors into the one-factor asset pricing model, what happens to the required returns, increase or decrease? If the expected future cash flows of the financial securities remain the same, will that increase or decrease the current market price? Why?

Answer 1

If we are adding more factor into the one factor model of asset pricing then the expected rate of return and required rate of return are going to go up because there will be a higher risk which will be discounted in the prices of the securities due to the multi factor analysis and when we will be discounting multiple type of risk in the assets then we will be trying to seek for higher rate of return because we want to get compensated for higher risk.

if the expected future cash flow of the financial security will remain the same,it will mean that the current market price of the company is going to decrease due to multifactor asset model because the risk is going to increase and it would be leading to overall decrease in price of the company because of high risk associated with the performance.