In the context of CAPM, what does a negative beta signify?

In the context of the Capital Asset Pricing Model (CAPM), a negative beta indicates that an investment is expected to move inversely to market movements. This means that when the overall market is doing well, the asset may be performing poorly, and vice versa.

A negative beta signifies a negative risk premium, which suggests that investors require a higher expected return when taking on additional risk that is not correlated with the market. However, since the asset moves opposite to the market, it is expected to offer a lower return than the risk-free rate. This reflects a unique situation where the asset is considered to provide a hedge or a counterbalance to market volatility but does not offer the attractive long-term returns typically sought by investors in risky assets.

This understanding helps articulate why a negative beta results in lower expected returns compared to the risk-free rate, as investors don’t demand higher returns from assets that can potentially act as a hedge against market declines.