Question

Q15) The market risk premium for next period is 8.50% and the risk-free rate is 3.80%. Stock Z has a beta of 0.636 and an expected return of 13.40%. What is the:

a) Market's reward-to-risk ratio?

b) Stock Z's reward-to-risk ratio?

Answer 1

Reward to Risk Ratio = [ Expected ret - Rf ] / Beta

Market Reward to Risk

= [ Expected ret - Rf ] / Beta

= [ 8.5% ] / 1

= 8.5%

Stock Z Reward to Risk

= [ Expected ret - Rf ] / Beta

= [ 13.40% - 3.80% ] / 0.636

= 9.6% / 0.636

= 15.09%