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In the case of a stock with negative beta and non-zero volatility, under CAPM the required return is less than the risk-free rate. This seems contradictory under CAPM assumptions that investors are rational/risk-averse and can invest unlimited amounts at the risk-free rate.
How should required returns less than the risk-free rate be interpreted? Why would a risk-averse investor purchase a stock with less return than the risk-free rate?
A negative beta investment whose expected return is less than the risk-free rate represents insurance against some macroeconomic risk that adversely affects the rest of the portfolio, therefore, making such a position aligned with the interests of risk-averse investors. Gold is a standard example of a negative beta investment because it acts as a hedge against higher inflation, which ruins financial investments such as stocks and bonds. Put options on stocks and selling forward contracts against indices may likewise have negative betas.
