Asked by Michelle Kotey on Jun 07, 2024
Verified
Explain what we mean when we say all assets have the same reward to risk ratio. What does this mean for investors?
Reward To Risk Ratio
A measure that evaluates the anticipated gains from an investment against the level of risk assumed to achieve these gains.
- Elucidate the concept of the efficient market hypothesis and what it entails for the correlation of risk and potential returns.
- Describe the significance of the Security Market Line (SML) and its interrelation with the Capital Asset Pricing Model (CAPM).
Verified Answer
IN
Irabaruta Nay-deenJun 09, 2024
Final Answer :
A constant reward to risk ratio means that the reward for bearing risk, measured as the risk premium, increases as the amount of risk, measured by beta, also increases. Investors who are risk averse will not consider taking additional risk if they expect to receive no additional compensation for doing so. This is an equilibrium concept which essentially restates the axiom that prices observed in efficient markets are considered fair.
Learning Objectives
- Elucidate the concept of the efficient market hypothesis and what it entails for the correlation of risk and potential returns.
- Describe the significance of the Security Market Line (SML) and its interrelation with the Capital Asset Pricing Model (CAPM).