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 1 year agoRelated Solutions
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plz explain more detail, thx!!!
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b. Milton considers buying the ABC stock. The ABC stock pays a
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