What if an asset has a reward-to-risk ratio of 8 (implying that the asset plots above the line)? • What if an asset has a reward-to-risk ratio of 7 (implying that the asset plots below the line)?
What if an asset has a reward-to-risk ratio of 8 (implying that the asset plots above the line)? • What if an asset has a reward-to-risk ratio of 7 (implying that the asset plots below the line)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
REWARD-TO-RISK RATIO:
DEFINITION AND EXAMPLE
• The reward-to-risk ratio is the slope of the
line illustrated in the previous example
▪ Slope = (E(RA) – Rf) / (A – 0)
▪ Reward-to-risk ratio for the previous example = (20 – 8) / (1.6 – 0) = 7.5
• What if an asset has a reward-to-risk ratio
of 8 (implying that the asset plots above
the line)?
• What if an asset has a reward-to-risk ratio
of 7 (implying that the asset plots below
the line)?
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