What is the sign of the risk premium of a negative-beta stock? Explain
QUESTION
What is the sign of the risk premium of a negative-beta stock? Explain. (Assume the risk premium of the market portfolio is positive.)
CAPM equation: E(ra)=Rf (E(rm)-Rf)a Where: E(ra) = Expected return on stock a Rf = Risk free rate of return E(rm) = Expected return on the market portfolio a = Beta of the security a So, E(ra) Rf = (E(rm)-Rf) a E(ra) Rf shows the risk premium for stock¦
a. If beta is negative but market risk premium (E(rm)-Rf) is positive, then as per the equation, right side will be negative. Hence, Risk premium for stock will be negative.
ANSWER:
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