Chapter 11.7, Problem 11.7BCQ

Summary Introduction

To discuss: The meaning of security market line and the reason why all the assets in a well-functioning market plot on the security market line.

Introduction:

The reward-to-risk ratio indicates the return of a risky asset relative to its beta. The reward-to-risk ratio is expressed as follows:

$\text{Reward-to-risk ratio}=\frac{E(R_i)-R_f}{{\beta }_i}$

Where,

E(R_i) refers to the expected return on a risky asset

R_f refers to the risk-free rate

β_i refers to the beta coefficient of the risky asset