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Melvin, USA
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Can Beta of a Stock be 0? And can Beta be Negative?
Question on CAPM: I know that in the CAPM Model the Beta for a stock can be less than one. If the company has a Beta of 0.33, then it is supposed to be 3 times less risky than the overall market. But can Beta also be zero? And can it be negative?
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Pereira, Portugal
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Can Beta be zero ? Assuming a Beta=0 is the same as to say that the r=Rf. Then, the security under valuation has the same expected earnings as a risk free asset. Finally, the only asset with a risk free rate is assumed to be government bonds.
So, saying that some asset has Beta=0 is equivalent to say that asset is risk free or is a government bond
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CSB Nair, India
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Stock Beta =<0 The beta can well be 0 or negative if the expected earnngs are below the risk free rate.
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Thomas, USA
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Stocks with a negative ß A company with a ß of 1.000 has the same expected return rate as the risk free rate.
I therefore believe that CSB Nair is incorrect: if the expected earnings are just lower than the risk free rate, then the company has a ß between 0 and 1, but not negative.
Yet it is possible to imagine a company with a negative beta! This is (only) the case when its returns are counter-cyclical and move opposite to the market.
Of course, the beta of most companies' stock is positive. But there are financial assets which are designed to have negative betas. For example, funds that engage exclusively in short-selling make money when the market is falling and lose when the market is rising. Including these assets in your portfolio decreases your volatility.
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Harold, Canada
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Beta of a stock A beta of one means the stock moves with the market: in other words when the market moves up 5% the stock moves up 5%.
A stock with a beta between 0 and 1 moves with the market but to a lessor degree. Such a stock can be called a
conservative investment.
A stock with a beta greater than 1 is a stock which moves in the same direction as the market but it moves more than the market moves. Such a stock can be referred to as
aggressive. In other words when the market moves up 5%, a stock with a Beta of 2 moves up 10%.
A stock which has a negative beta moves in the opposite direction as the market. A stock with a beta of -2 declines 8% if the market goes up by 4% and conversely climbs 8% if the market falls by 4%.
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Walter, UK
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Gold and Negative Beta Gold and gold--related stocks are typically beta-negative. If all or most company stocks go down (a lot), many people will flee into gold.
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Bikash, India
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What about cash?? Assets with beta 0 are same as risk-free assets and have same expected return and not assets with beta 1 as Thomas believes.
Can assets have negative beta? Well, I don't think so. Beta is a measure of risk and accordingly determines expected return and not the other way round. So, an asset class (say short selling) gives opposite return to market does not mean it is less risky than a risk-free return and so we would expect it to yield lesser return than risk-free rate. In fact, we would not expect any asset class to give return less than risk-free rate? would we?? No-one, not even the most risk-averse investor, need an asset class with negative beta.
Yes, the ways to determine beta might give a negative value (Say for a security that have performed counter to the market in past say 2 yrs), but that is a limitation of determining beta and not that beta is negative.
But yeah, I am not sure on the beta of cash.....
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Liaqat Ali, Pakistan
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CAPM It is the theory that relates the expected return with the risk, so when we say that the beta is zero then it means that the security is risk free and then the expected return should be none too. It is impossible in fact insane to consider a security bearing no risk, other than those who come under the definition of risk free securities. An investor in the market is not for doing a picnic, rather he is there to get some return on his investment. Even a risk-averse investor cannot compromise on return. So, I think that those who are of the opinion that there can be zero risk are not actually looking the situation with the right spectacles on.
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Anna, UK
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CAPM Risk-free security does not necessarily mean zero return-the return will be equal to the interest rate-i.e. Government bonds with 5% return-they are considered as risk-free, but still generate 5 % return although it could be argued how much of that 5 % is real money and how much is eaten by inflation etc.
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Ghanshyam
Manager, India
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Gold Industry may have a Negative Beta If beta < 0 then the investment's returns will move, on average, in the opposite direction to the market's returns, to a lesser extent if beta > -1, to the same extent if beta = -1, and to a greater extent if beta < -1.
In practice it is rare to find negative beta stocks since they go against the trend of the market. One possible sector that could consist of negative beta stocks is the gold industry that tends to go against the trend shown by equity markets.
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Mukela Namushi Mubano
Accountant, Zambia
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Inflation in CAPM I totally agree with @Anna. Inflation effects seem to be ignored when we are dealing with risk-free securities. All seems to be held constant. If I deposit funds today at a rate of 5%, is inflation taken into consideration when I invest in a government bond?
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nitish dwivedi
Student (Other)
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Beta Can Be Negative: Gun Companies Friends, at the time of war when all companies profits are falling, gun companies actually are making more profits by selling more. And when the war is over their earnings fall, while all other companies earnings are going up...
So the crux is gun manufacturer companies have a negative beta.
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SCOTT DIAMOND, United States
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Beta Does Not Imply No Risk! While I would agree that safe investments have a low beta, this does not mean that if the beta is low the investment is safe. I follow stock of startup. Often their beta is low. Their success is not tied to the market. Their success may be tied to what Apple includes in the operating system or whether consumers switch to eating more protein or millions of other factors which do not tie into the overall market.
Yet, these startups are generally EXTREMELY risky. I watch some startups with a beta of < 0.1, but they are not safe. Over time, as the company grows I would eventually expect their performance to be tied to the market.
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Warren D. Miller, CPA, CFA
Strategy Consultant, United States
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Company Beta = 0? No Way! Under no conditions would the beta of any for-profit enterprise = 0. As others have pointed out, that would mean, in essence, that the discount rate for future cash flows = the risk-free rate. (I would argue that, especially for non-public companies, separate estimates of unsystematic risk at three levels--macroenvironment, industry/strategic group, and the company itself--should also be components of a firm's discount rate. This approach works especially well in valuing small and medium-sized enterprises that are privately held.
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mickiy, Canada
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Risk-free Asset: Beta of Zero? "A risk free asset by definition has a beta of zero".
Is this true or false?...
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Jaap de Jonge
Editor, Netherlands
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Any Risk-free Asset Has a Beta of Zero @mickiy: Indeed by definition a risk-free asset has a Beta of zero (0), that statement is always true and valid.
In other words, a completely risk-free asset can never have a beta other than zero....
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