Question

In: Finance

Is Positive Beta Better than Negative Beta? A Beta factor represents risk in a financial instrument...

Is Positive Beta Better than Negative Beta?

A Beta factor represents risk in a financial instrument or commodity.

1. Explain the reasons for changes in beta and explain if one should be more concerned with a negative versus positive factor. Be sure to reference volatility.

2. Please provide an example of negative Beta.

3. PLEASE LIST REFERENCES

PLEASE HAVE IT TYPED NOT HANDWRITTEN, I CANNOT UNDERSTAND HAND WRITTEN. THANK YOU

Solutions

Expert Solution

Beta is a measure of systematic risk.

It measures the sensitivity of the returns of an asset to the returns in the market.
A positive Beta of 1.3 means that if the market returns increase by 1%, the returns of the asset will increase by 1.3%.
A negative beta asset is an asset which in general will perform in the reverse direction compared to the market.
Haing said that, this does not mean that a positive Beta Asset is better.
Assets with both positive and negative beta can be volative assets.

The Beta of an asset can change over time due to change in the volativity of the returns of the asset compared to the market and change of the correlation between the asset returns and the market return. Thus we can say that, Beta can change due to the change in the risk profile of the asset.
One should be more concerned with a negative beta asset as it tends to go in a reverse direction when compared to the market.

An example of a negative Beta asset could be Gold as gold tends to behave better when stock market declines. (As when stock markets decline, people tend to move to precious metals like gold as Investments).. However in general, it is very difificult to find an asset with a negative Beta.


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