An investor is evaluating two investments: a risk-free asset and the common stock of Schallheim Inc. The investor is going to construct a portfolio consisting of the risk-free asset and Schallheim's stock. The following table shows the various portfolio expected return and beta combinations that could be achieved by his portfolio.
PErcentage of port. Portfolio Portfolio BEta
in Schallheim Expected Ret.
0% 5.5% 0.0
25% 6.75% .25
50% 8% .50
75% 9.25% .75
100% 10.5% 1.00
125% 11.75% 1.25
What is the reward-to-risk ratio for Schallheim's stock?
6%
7%
8.0%
9%
5%
8.00%
Merton Corp. has a higher beta than Schallheim Inc. Both stocks trade in the same market. Which of the following most accurately describes Merton's reward-to-risk ratio? Assume the market is efficient.
Merton's reward-to-risk ratio is lower than Schallheim's ratio.
Merton's reward-to-risk ratio is higher than Schallheim's ratio.
Merton's reward-to-risk ratio is the same as Schallheim's ratio.