Question

The Royal Seattle Investment Club has​ $100,000 to invest in the equity market. Frasier advocates investing the funds in KSEA Radio with a beta of 1.6 and an expected return of 16.8​%. Niles advocates investing the funds in Northwest Medical with a beta of 1.1 and an expected return of 14.7​%. The club is split​ 50/50 on the two stocks. You are the deciding​ vote, and you cannot pick a split of​ $50,000 for each stock. Before you​ vote, you look up the current​ risk-free rate​ (the one-year U.S. Treasury bill with a yield of 4.00​%). Which stock do you​ select?

Answer 1

Northwest Medical

Step-by-step explanation:

In this question, we have to find out the risk to reward ratio for stocks

KSEA Radio = (Expected return - risk free rate) ÷ (Beta)

= (16.8% - 4%) ÷ (1.6)

= 8%

Northwest Medical = (Expected return - risk free rate) ÷ (Beta)

= (14.7% - 4%) ÷ (1.1)

= 9.72%

By comparing these two stocks, we get to know that the Northwest Medical gives high return then the KSEA Radio .

So, Northwest Medical should be selected