08 May WHY WOULD ANYONE EVER INVEST IN AN ASSET THAT HAS AN EXPECTED AND REQUIRED RETURN THAT IS NEGATIVE? EXPLAIN.
Stock – Risk and ReturnA. Common stock A has an expected return of 10% a standard deviation of future returns of 25% and a beta of 1.25. Common stock B has an expected return of 12% a standard deviation of future returns of 15% and a beta of 1.50. Which stock is riskier? Explain. b. Suppose rf is 5% and rM is 10%. According to the SML and the CAPM an asset with a beta of -2.0 has a required return of negative 5% [= 5 – -2(10 – 5)]. Can this be possible? Does this mean that the asset has negative risk? Why would anyone ever invest in an asset that has an expected and required return that is negative? Explain.
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