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Anonymous

18 Apr 2019

Stocks

How to do Capital Asset Pricing Model with negative Beta?

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Isaac Chan

12 Mar 2019

Business at NUS

Yes it seems possible, it just means that your returns will be lower than the risk free rate and even negative. Negative beta might be applicable for asset classes like gold, which in some instances, negatively correlates with how the market actually performs.

So when the market does well, gold performs worse, but the converse is true also. I think that as the markets grow over time, gold tends to perform worse. Aswath Damodaran tracked and he mentioned that gold had nominal returns that were even lower than the risk-free rates over the past 40 years.

The analogy that Damodaran used of gold was actually quite interesting, he mentioned that it is like paying insurance, where most of the time you are paying premiums for it and losing money. But like gold, it is a hedge when things go bad so you don't lose as much as you originally would. I think this is the real value of insurance and gold.

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