What is the expected return of negative beta?

When the covariance is negative, the beta is negative and the expected return is lower than the risk-free rate. A negative-beta asset requires an unusually low expected return because when it is added to a well-diversified portfolio, it reduces the overall portfolio risk.

What if a stock has a negative beta?

A negative beta correlation means an investment moves in the opposite direction from the stock market. When the market rises, a negative-beta investment generally falls. When the market falls, the negative-beta investment will tend to rise.

How is a stock’s expected return related to its beta?

According to the CAPM, a stock’s expected return is positively related to its beta. The CAPM states that the expected risk premium on any security equals its beta times the market risk premium.

Is it possible for an asset to have a negative beta What would the expected return on such an asset be why?

It is also possible to have a negative beta; the return would be less than the risk-free rate. A negative beta asset would carry a negative risk premium because of its value as a diversification instrument.

What does a negative beta mean in statistics?

The beta coefficient is the degree of change in the outcome variable for every 1-unit of change in the predictor variable. If the beta coefficient is negative, the interpretation is that for every 1-unit increase in the predictor variable, the outcome variable will decrease by the beta coefficient value.

What is negative expected return?

A negative rate of return is a loss of the principal invested for a specific period of time. The negative may turn into a positive in the next period, or the one after that. A negative rate of return is a paper loss unless the investment is cashed in.

What causes negative beta stocks?

A negative beta correlation would mean an investment that moves in the opposite direction from the stock market. When the market rises, then a negative-beta investment generally falls. When the market falls, then the negative-beta investment will tend to rise.

Why should a stock beta and expected return be related?

Investors expect to be compensated for risk and the time value of money. If a stock has a beta of less than one, the formula assumes it will reduce the risk of a portfolio. A stock’s beta is then multiplied by the market risk premium, which is the return expected from the market above the risk-free rate.

How do you calculate expected return in beta?

Expected return = Risk Free Rate + [Beta x Market Return Premium]

Why would a stock have a negative beta?

Negative BETA may be caused by anomalous trading activity (e.g., MEME stocks like $AMC or $GME), poor business performance during a rising market, or a counter-cyclical stock that moves against the market (e.g., discount retailers). Some stocks have declined during a rising market (e.g., Clorox or $CLX).

What is a good beta for a stock?

Beta is a concept that measures the expected move in a stock relative to movements in the overall market. A beta greater than 1.0 suggests that the stock is more volatile than the broader market, and a beta less than 1.0 indicates a stock with lower volatility.