The common stock of Industrial Co. has an expected return below the risk-free rate. Assuming a...
The common stock of Industrial Co. has an expected return below the risk-free rate. Assuming a positive market risk premium, what do you know about Industrial’s beta, and would investors purchase this stock?
Homework Answers
Solution:
According to the CAPM model, the expected rate of return can be calculated using the risk-free rate, beta, and risk premium.
Expected return = Risk-free rate + Beta * Market risk premium
It is given that the market risk premium is positive and the expected rate of return is less than the risk-free rate, it can be possible only when a beta is negative.
So we can clearly say that the beta is definitely negative.
An investor should not purchase this as she will get a better return in risk-free assets.
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