Question

Briefly discuss why stocks with low and negative betas offer such low rates of return when...

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

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Answer #1

An investor is compensated only for market/systematic/non diversifiable risk and not for unique or firm specific risk. So the return of a stock is dependent upon beta and not upon standard deviation hence stocks with low or negative betas provide low returns. When we say stocks are risky, it means they have high volatility which is measured by standard deviation but most of that comes from firm specific risk and very little of that comes from systemic risk in case of low or negative betas.

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