Asked by Zitlaly Flores on May 03, 2024
Verified
In an efficient market, all stocks should have the same risk-to-reward ratio. Explain what this means in terms of the returns which investors should expect to earn.
Risk-To-Reward Ratio
A benchmark used by investors to gauge the prospective returns of an investment in comparison to the risk associated with securing those returns.
Efficient Market
A type of market where all relevant information is rapidly and correctly reflected in securities prices, allowing them to be bought and sold at their fair value.
- Describe efficient market hypothesis and its implications for risk-to-reward ratios.
Verified Answer
ZK
Zybrea KnightMay 07, 2024
Final Answer :
If the risk-to-reward ratio is constant for all stocks, then all stocks will be correctly priced and investors will earn a return which correctly accounts for the systematic risk which they are assuming.
Learning Objectives
- Describe efficient market hypothesis and its implications for risk-to-reward ratios.