Answered: What if an asset has a reward-to-risk…

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)?

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 4QE

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Concept explainers

Liquidity Risk Exposure

Answer: c

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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