In a competitive market the reward to risk ratio can be expressed as:
A) [E(RA) - Rf]/ßa [E(RB) - Rf]/ßb
B) [E(RA ) - Rf]/ßa = [E(RB) - Rf]/ßb
C) [E(RA) - Rf] = ßa
D) E(RA) = E(Rb)
E) E(RA) - E(RB) = Rf

Question

In a competitive market the reward to risk ratio can be expressed as:
A) [E(RA) - Rf]/ßa > [E(RB) - Rf]/ßb
B) [E(RA ) - Rf]/ßa = [E(RB) - Rf]/ßb
C) [E(RA) - Rf] = ßa
D) E(RA) = E(Rb)
E) E(RA) - E(RB) = Rf

Quizplus · Accepted Answer

In a competitive market, the reward to risk ratio, also known as the Sharpe ratio, should be equal for all assets. This is expressed as [E(RA) - Rf]/ßa = [E(RB) - Rf]/ßb, indicating that the excess return per unit of risk (beta) is the same across different assets.

In a Competitive Market the Reward to Risk Ratio Can