
Melvin

Question on CAPM: I know that in the CAPM Model the Beta for a stock can be less than one. If the company has a Beta of 0.33, then it is supposed to be 3 times less risky than the overall market. But can Beta also be zero? And can it be negative? (...) Read more? Sign up for free

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Pereira


Can Beta be zero ?
Assuming a Beta=0 is the same as to say that the r=Rf. Then, the security under valuation has the same expected earnings as a risk free asset. Finally, the only asset with a risk free rate is assumed to be government bonds.
So, saying that some asset has Beta=0 is equivalent to say that asset is risk free or is a government bond



CSB Nair


Stock Beta =<0
The beta can well be 0 or negative if the expected earnngs are below the risk free rate.



Thomas


Stocks with a negative ß
A company with a ß of 1.000 has the same expected return rate as the risk free rate.
I therefore believe that CSB Nair is incorrect: if the expected earnings are just lower than the risk free rate, then the company has a ß between 0 and 1, but not negative.
Yet it is possible to imagine a company with a negative beta! This is (only) the case when its returns are countercyclical and move opposite to the market.
Of course, the beta of most companies' stock is positive. But there are financial assets which are designed to have negative betas. For example, funds that engage exclusively in shortselling make money when the market is falling and lose when the market is rising. Including these assets in your portfolio decreases your volatility.



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