Question

1. Consider an asset with a beta of 1.2, a risk-free rate of 4.4%, and a market return of 12.4% What is the reward to risk ratio? in %

Answer 1

HI

Here we will use capital asset pricing model to find out expected return of the stock.

As per capital asset pricing model

Expected Return = risk free rate + beta*(market return - risk free rate)

Expected Return = 4.4 + 1.2*(12.4- 4.4)

Expected Return = 4.4 + 1.2*8

= 4.4 + 9.6 = 14%

Reward to risk ratio = (expected return - risk free rate)/beta

= (14- 4.4)/1.2

= 9.6/1.2 = 8%

Thanks