CAPM Beta Query

agrawalanks
Posts: 3
Joined: Sat Nov 10, 2012 2:35 am

CAPM Beta Query

Postby agrawalanks » Sat Nov 10, 2012 2:44 am

Hi Everyone,
The below is one of the question from Quiz 2 on Foundations of Risk Mgt.
Can someone please justify how point III is correct in the below question?
i.e. A negative beta might occur even when both the benchmark index and the stock under consideration have positive returns -> Correct or Incorrect?


Manoj says that Beta in CAPM has the following properties-
I. Beta varies between +3 and -3
II.Any security with a zero beta is risk-free
III.A negative beta might occur even when both the benchmark index and the stock under consideration have positive returns.
IV.Since beta is a result of regression of one stock against the market where it is quoted, betas from different countries are not comparabale.Which of the above do you think are true
Choose one answer.
a. II, III and IV
b. II and III
c. All of the given
d. II and IV
The correct answer is II, III, and IV.
Incorrect
Marks for this submission: 0/1.

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content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: CAPM Beta Query

Postby content.pristine » Mon Nov 12, 2012 5:34 pm

Hi,

III is true: It is possible that both the stock and the index move in the same direction.
The trick here is that this may be the incidence of 1 single period, but generally they move in opposite directions.
The slope of the regression line can still be negative and this data point can be an outlier..

Hope this helps!
8-)


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