AdvancedMultiple choice
Two nearly identical factors · Part 3 of 3
You regress a stock’s returns on two standardised factors whose sample correlation is 0.95. Both factors genuinely matter.
The true loadings are 1.0 on each factor. What does the lasso tend to report instead?
- ABoth close to 1.0, slightly shrunk towards zero
- BOne near 2 and the other at zero, picked almost arbitrarily
- CBoth exactly zero for any penalty at all
- DLarge coefficients of opposite sign that largely cancel each other out
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