A risky asset has a beta of .88 and an expected return of 7.4 percent. What is the reward-to-risk ratio if the risk-free rate is 2.8 percent?
A) 4.04 percent
B) 5.23 percent
C) 6.51 percent
D) 8.41 percent
E) 11.59 percent

Question

Quizplus · Accepted Answer

The reward-to-risk ratio is calculated by subtracting the risk-free rate from the expected return of the asset, dividing the result by the asset's beta:

Reward-to-risk ratio = (expected return - risk-free rate) / beta

Reward-to-risk ratio = (7.4% - 2.8%) / 0.88

Reward-to-risk ratio = 4.6% / 0.88

Reward-to-risk ratio = 5.23%

Therefore, the correct answer is B.

A Risky Asset Has a Beta of