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 – riskfree 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 RewardtoRisk Ratio: Definition
RewardtoRisk
and Example
and The rewardtorisk ratio is the slope of the line
The
illustrated in the previous example
illustrated Slope = (E(RA) – Rf) / (βA – 0)
Rewardtorisk ratio for previous example =
(20 – 8) / (1.6 – 0) = 7.5 What if an asset has a rewardtorisk ratio of 8
What
(implying that the asset plots above the line)?
(implying
What if an asset has a rewa...
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This document was uploaded on 03/01/2014 for the course FINANCE 250 at Indiana.
 Spring '14

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