Question

In: Finance

Discuss whether a risky asset can have a negative beta and what the CAPM predicts about...

Discuss whether a risky asset can have a negative beta and what the CAPM predicts about its return.

Solutions

Expert Solution

Answer-

Yes, the risky asset can have negative beta.

The risk added by an investment to a well diversified portfolio makes the overall risk of the portfolio go down, has a negative beta. A negative beta investment represents insurance against some macro economic risk.

Investment in gold which acts as a hedge against higher inflation can be an example of negative beta as it moves in opposite direction to stocks in terms of returns. As inflatiion increases the stock value decreases whereas tthe gold value goes up.

CAPM

Expected return = risk free rate + Beta x ( Market return - risk free rate )

OR

Expected return = risk free rate + Beta x Market risk premium

CAPM-betas positively predict asset returns when market returns are predicted to be high as is evident from the above formula.

Expected return in CAPM in diretly proportional to market return or market risk premium and Beta which is the risk of a stock or portfolio.



jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

CAPM and Beta. Capital Asset Pricing Model (CAPM) is a theoretical model that indicates the relevant...
CAPM and Beta. Capital Asset Pricing Model (CAPM) is a theoretical model that indicates the relevant risk of an investment as measured by its beta coefficient. Discuss the CAPM and beta and how beta and CAPM provide information about the rate of return for a Beta is a measure of a stock’s relevant risk. There is a relationship between risk and reward for a given investment.
(CAPM) talk about major determinants of Beta(β), and discuss at least 3 Problems with Estimating Beta(β)...
(CAPM) talk about major determinants of Beta(β), and discuss at least 3 Problems with Estimating Beta(β) and Solution for them.
Answer the following question about beta and CAPM and explain why. a. If the CAPM holds...
Answer the following question about beta and CAPM and explain why. a. If the CAPM holds (market portfolio could be used to compute betas for specific projects/firms), it does not matter whether you invest in one stock or in a portfolio of stocks. All stocks are fairly priced (markets are efficient) and you will receive the appropriate compensation for the risks that you bear. True or false? b. Suppose the CAPM holds. If two stocks have the same correlation with...
Find one company that has negative beta. Also, explain what does that negative beta say about...
Find one company that has negative beta. Also, explain what does that negative beta say about the risk of investment in that company?
Briefly describe the Capital Asset Pricing Model (CAPM). How is the beta coefficient defined and what...
Briefly describe the Capital Asset Pricing Model (CAPM). How is the beta coefficient defined and what does it capture? What is the meaning of alpha in the same model
Q1) You have a portfolio of one risky asset and one risk-free asset. The risky asset...
Q1) You have a portfolio of one risky asset and one risk-free asset. The risky asset has an expected return of 20% and a variance of 16%. The T-bill rate (that is the risk-free rate) is 6%. Your client Mary is thinking of investing 75% of her portfolio in the risky asset and the remaining in a T-bill. If Mary wants to find a general equation for the expected return and risk of her portfolio what are the equations that...
based on the CAPM what should be the beta of beta of a stock that has...
based on the CAPM what should be the beta of beta of a stock that has an expected return of 12%, if the risk free is 3.5% and expected return of market portfolio is 12%?
Both Beta in the CAPM and the standard deviation measure the risk of any asset. Which...
Both Beta in the CAPM and the standard deviation measure the risk of any asset. Which of these measures best captures the risk of an asset when we think about the return we expect from that asset? Explain. plz explain more detail, thx!!!
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. b. Milton considers buying the ABC stock. The ABC stock pays a constant dividend of $5 in perpetuity, and the beta of the ABC stock is 1.2. The risk-free rate is 4%, and the expected market return is 12%. i. Compute the price of the ABC stock based on the CAPM. ii. Suppose the market price of...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero...
a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. b. Milton considers buying the ABC stock. The ABC stock pays a constant dividend of $5 in perpetuity, and the beta of the ABC stock is 1.2. The risk-free rate is 4%, and the expected market return is 12%. i. Compute the price of the ABC stock based on the CAPM. ii. Suppose the market price of...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT