Problem 12-12 Stock Y has a beta of 1.25 and an expected return of 15.05 percent
ID: 2711923 • Letter: P
Question
Problem 12-12
Stock Y has a beta of 1.25 and an expected return of 15.05 percent. Stock Z has a beta of .60 and an expected return of 8 percent. If the risk-free rate is 4.0 percent and the market risk premium is 8.2 percent, what are the reward-to-risk ratios of Y and Z? (Do not round intermediate calculations. Round your answers to 4 decimal places.)
Stock Y has a beta of 1.25 and an expected return of 15.05 percent. Stock Z has a beta of .60 and an expected return of 8 percent. If the risk-free rate is 4.0 percent and the market risk premium is 8.2 percent, what are the reward-to-risk ratios of Y and Z? (Do not round intermediate calculations. Round your answers to 4 decimal places.)
Explanation / Answer
Using Treynor Ratio :
Stock Y
Reward-to-risk ratios = (Ri- Rf)/Bi
Reward-to-risk ratios = (15.05%-4%)/1.25
Reward-to-risk ratios = 0.0884
Stock Z
Reward-to-risk ratios = (Ri- Rf)/Bi
Reward-to-risk ratios = (8%-4%)/0.6
Reward-to-risk ratios = 0.0667
Answer
Y 0.0884 Z 0.0667