Question

Explain the following paradox. A put option is a highly volatile security. If the underlying stock has a positive beta, then a put option on that stock will have a negative beta (because the put and the stock move in opposite directions). According to the CAPM, an asset with a negative beta, such as the put option, has an expected return below the risk-free rate. How can an equilibrium exist in which a highly risky security such as a put option offers an expected return below a much safer security such as a Treasury bill?


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  • CreatedMarch 26, 2015
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