The reward-to-risk ratio for stock A is less than the reward-to-risk ratio of stock B.Stock A has a beta of 0.82 and stock B has a beta of 1.29.This information implies that:
A) stock A is riskier than stock B and both stocks are fairly priced.
B) stock A is less risky than stock B and both stocks are fairly priced.
C) either stock A is underpriced or stock B is overpriced or both.
D) either stock A is overpriced or stock B is underpriced or both.
E) both stock A and stock B are correctly priced since stock A is riskier than stock B.

Question

Quizplus · Accepted Answer

The reward-to-risk ratio, often reflected in the Sharpe ratio, indicates how much excess return you receive for the extra volatility that you endure for holding a riskier asset. A lower reward-to-risk ratio for stock A compared to stock B, combined with stock A having a lower beta (0.82) than stock B (1.29), suggests that stock A is less risky but offers lower returns for its risk level compared to stock B. This discrepancy implies that stock A might be overpriced (offering too little reward for its risk) or stock B might be underpriced (offering more reward for its risk), or both.

The Reward-To-Risk Ratio for Stock a Is Less Than the Reward-To-Risk