Question

Stock Y has a beta of 1.10 and an expected return of 13.15 percent. Stock Z has a beta of .80 and an expected return of 6 percent. If the risk-free rate is 5.0 percent and the market risk premium is 7.6 percent, what are the reward-to-risk ratios of Y and Z?

Answer 1

For Y = 7.31%

For Z = 1.25%

Explanation:

The computation of reward-to-risk ratios of Y and Z is shown below:-

Reward to Risk Ratio = (Expected Return of Security - Risk free Return) ÷ Beta of Security

Reward to Risk Ratio Y = (13.05% - 5%) ÷ 1.10

= 7.31%

Reward to Risk Ratio Z = (6% - 5%) ÷ 0.80

= 1.25%

hence, the same is to be considered