Question

A stock has a beta of 1.29 and an expected return of 11.57 percent. If the risk-free rate is 4.4 percent, what is the stock's reward-to-risk ratio

Answer 1

5.56%

Step-by-step explanation:

the reward to risk ratio of this stock is:

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

reward to risk = (11.57% - 4.4%) / 1.29 = 5.56%

The reward to risk ratio shows the investors how much extra money they should expect to earn for every dollar that they invest in a certain stock due to the stock's risk. A stock with a beta of 1 only carries the market risk, but since this stock's beta is 1.29, its risk is higher.