We Do Bankruptcies is a law firm that specializes in providing advice to firms i

Question

We Do Bankruptcies is a law firm that specializes in providing advice to firms in financial distress. It prospers in recessions when other firms are struggling. Consequently, its beta is negative, ?.2. a. If the interest rate on Treasury bills is 5% and the expected return on the market portfolio is 15%, what is the expected return on the shares of the law firm according to the CAPM? b. Suppose you invested 90% of your wealth in the market portfolio and the remainder of your wealth in the shares in the law firm. What would be the beta of your portfolio?

Explanation / Answer

here is nothing special in any of your equations requiring beta to be positive. Just do it the same way you would if beta was 0.5. There is also no reason the expected return of a stock can't be negative according to CAPM.

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