Question

Briefly discuss why stocks with low and negative betas offer such low rates of return when stocks are said to be risky in general.

Answer 1

Stocks migh be risky but when beta with low and negative betas means the correlation of returns with market returns is low or negative. High risky stocks might have high standalone risk or standard deviation. As per capm formula Required rate=Risk Free rate+Beta*(Market return-Risk Free Rate). Lower beta means lower returm because the stock prices move in opposite direction to market. If market risk premium increases then then these stock prices reduces. Usually market prices always increases except recession, so most of the time returns are low or negative of such stocks.