Question

Is it possible for an asset to have a negative beta? What would the expected return on such an asset be? and Why?

Answer 1

Yes it is possibleto have an asset with negative beta. Negative beta implies that the asset has an inverse relation with the market index. When the market rises, the asset will fall and when the market falls, these assets rise.

The expected return on such an asset is less than the riskfree rate. When such assets are included in the portfolio, this reduces the overall risk of the portfolio. This is actually true for gold or gold ETF. These assets can prove to be an insurance for a major macro economic risk.

Why these have returns less than the risk free rate is because the return expected = cost of capital which is calculated as the returns expected by the shareholders

Return expected = risk free rate + beta* market risk premium

when the beta is negative, beta * market risk premium is subtracted from the riskfree rate which make its return less than the risk free rate.