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CAPM for investment decision

surekinkinwin

New Member
I come across a question and willing to seek for help,,,
A equity has negative beta = -0.5, and the total risk (standard derivation of equity is much higher than other equities in portfolio). The average return of this equity is 9%. Market average return is 8.5%.

A: The equity is not good investment. Total risk is high and return over market is only 0.5%
B: The equity is good investment. Systematic risk is low(negative) and earn more than market.

Can anyone discuss if 2 above is correct or not?
From my view, A is discussing total risk (Unsystematic risk + Systematic risk), as given that Systematic risk is negative, we only have unsystematic risk left behind which can be fully hedged away.
B is concerning on systematic risk. The equity is a good investment if it is used for h
 

Meredius

New Member
Hmmm.. my assumption for 2 would be:

Since it's lower than 1 Beta, you're not taking on excess risk but rather adverse correlation to the market which would be used to hedge systematic risk or decrease volatility in a portfolio with added diversification.
You're also technically "underperforming" the market but getting a higher return although volatility isn't specified so more information would be needed to qualify the investment? Unless we're going for the ceteris paribus assumption.

I hope this is coherent as I'm really tired right now. :)

Cheers,
 
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