Which factor primarily influences the risk premium of a negative beta asset?

The risk premium of a negative beta asset is primarily influenced by the asset's correlation with market movements. In finance, beta measures an asset's sensitivity to market changes; a negative beta indicates that the asset tends to move inversely to the market. This unique characteristic results in the need for a distinct risk premium, as investors require compensation for holding an asset that behaves differently from the broader market.

When the market is performing well, an asset with a negative beta is expected to perform poorly, and vice versa. As a result, the risk premium is determined by how much investors anticipate compensating for the risk associated with this inverse relationship. Therefore, the correlation with market movements is crucial in understanding why investors would seek additional returns for holding a negative beta asset.

While market demand, liquidity, and current interest rates can impact an asset's price and its overall attractiveness, they do not directly affect the fundamental relationship between the asset and market movements as measured by its beta. This makes the correlation of the asset with market changes the primary influence on its risk premium.