Chapter 13.7, Problem 13.7ACQ

Summary Introduction

To discuss: The fundamental relationship that exists between the risk and returns in a well-regulated market.

Introduction:

The reward-to-risk ratio indicates the return of a risky asset relative to its beta. The difference between the expected return on a risky asset and the risk-free rate divided by the beta coefficient of the security will give the reward-to-risk ratio of a security. 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