We use the beta coefficient to measure we systematic

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Unformatted text preview: beta systematic risk as the overall market systematic A beta < 1 implies the asset has less systematic risk beta than the overall market than A beta > 1 implies the asset has more systematic beta risk than the overall market risk 30 30 Beta and the Risk Premium Remember that the risk premium = expected Remember return – risk-free rate return The higher the beta, the greater the risk The premium should be premium Can we define the relationship between the risk Can premium and beta so that we can estimate the expected return? expected YES! 31 31 Example: Portfolio Expected Example: Returns and Betas Returns 30% Expected Return 25% E(RA) 20% 15% 10% R 5% f 0% 0 0.5 1 1.5 β A 2 2.5 3 Beta 32 32 Reward-to-Risk Ratio: Definition Reward-to-Risk and Example and The reward-to-risk ratio is the slope of the line The illustrated in the previous example illustrated Slope = (E(RA) – Rf) / (βA – 0) Reward-to-risk ratio for previous example = (20 – 8) / (1.6 – 0) = 7.5 What if an asset has a reward-to-risk ratio of 8 What (implying that the asset plots above the line)? (implying What if an asset has a rewa...
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