Is it possible that a risky asset could have a negative beta

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Question: Beta, as the sole measure of systematic risk according to the Capital Asset Pricing Model (CAPM), is the workhorse of finance for estimating the cost of capital for project selection. The beta of a security represents the asset's sensitivity to movements in the market and is defined as the co-variance of the stock return with the market portfolio. By definition, the market as a whole has a beta of 1, and everything else is defined in relation to that: Stocks with a value greater than 1 are more volatile than the market, meaning they will generally go up more than the market goes up, and go down more than the market goes down.Stocks with a beta of less than 1 have a smoother ride as their moves are more muted than the market's, but they'll usually still go up when the market goes up and down when the market goes down. -Securities with a negative beta, which is unusual, will typically move inversely to the market.

So, when the market goes up, these securities fall, and vice versa. Using the information provided, do you think that it is possible that a risky asset could be a beta of zero. Based on the CAPM, what is the expected return on such an asset?

Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Can you explain your answer?

Reference no: EM133264752

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