According to CAPM, what is the expected return on an asset with a negative beta?

According to CAPM, what is the expected return on an asset with a negative beta?

• A. Equal to the market return
• B. Greater than the risk-free rate
• C. Less than the risk-free rate
• D. Equal to zero

Answer: (C)

The expected return on an asset with a negative beta is indeed less than the risk-free rate. In the Capital Asset Pricing Model (CAPM), beta measures an asset's sensitivity to market movements. A negative beta indicates that the asset tends to move inversely to the market; when the market rises, the asset's price is likely to fall, and vice versa. According to CAPM, the expected return of an asset is calculated using the formula: Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate) For an asset with a negative beta, the beta term in this formula will subtract from the risk-free rate, making the overall expected return lower than the risk-free rate. This reflects the asset's unique characteristic of performing better in a declining market. As a result, when the market is expected to perform poorly, an asset with a negative beta may provide returns lower than the risk-free rate, aligning with the interpretation that it is less risky in a market downturn. Therefore, it is accurate to state that the expected return on an asset with a negative beta is less than the risk-free rate.

The expected return on an asset with a negative beta is indeed less than the risk-free rate. In the Capital Asset Pricing Model (CAPM), beta measures an asset's sensitivity to market movements. A negative beta indicates that the asset tends to move inversely to the market; when the market rises, the asset's price is likely to fall, and vice versa.

According to CAPM, the expected return of an asset is calculated using the formula:

Expected Return = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

For an asset with a negative beta, the beta term in this formula will subtract from the risk-free rate, making the overall expected return lower than the risk-free rate. This reflects the asset's unique characteristic of performing better in a declining market. As a result, when the market is expected to perform poorly, an asset with a negative beta may provide returns lower than the risk-free rate, aligning with the interpretation that it is less risky in a market downturn.

Therefore, it is accurate to state that the expected return on an asset with a negative beta is less than the risk-free rate.