If you plotted the returns of a given stock against those of the market,and if you found that the slope of the regression line was negative,the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor,assuming that the observed relationship is expected to continue into the future.

Question

Quizplus · Accepted Answer

A negative slope of the regression line between the returns of a stock and the market implies that the stock has a negative beta, which means it is negatively correlated with the market. The CAPM assumes that investors are risk-averse and that they are compensated for taking on systematic (market) risk. If a stock has a negative beta, it implies that the investor can reduce their overall risk by adding this stock to a diversified portfolio, and, therefore, they should expect a lower return than the risk-free rate. Thus, the required rate of return on the stock should be less than the risk-free rate, not greater.

If You Plotted the Returns of a Given Stock Against