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2. Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset?

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Beta and CAPM

Capital Assets pricing model is the method uses to determine required rate of return of an asset. This method uses, Risk free rate, market return and beta (a measure of market risk) to determine required rate of return on an asset. Market risk premium is calculated by market return and risk-free rate.

Capital assets pricing model formula for calculation of cost of capital is mention below:

Beta is a measure of level of risk in investment. when beta of the company is changed that is level of risk change then the cost of capital of company is also change. If beta of a security is zero, then stock is considered as risk free security. So, as beta increases from zero the level of risk of an asset also increase.

So, a risky assets beta cannot be zero. Again, as beta value become negative it shows security has less risk. So, a risky asset must have positive higher beta.

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