If the reward to risk ratio for Schallheim is 6%, can someone please help with b

Question

If the reward to risk ratio for Schallheim is 6%, can someone please help with bottom question?

7. The price of risk Aa Aa An investor is evaluating two Investments: a risk-free asset and the common stock of Schallhelm Inc. The investor is going to construct a portfolio consisting of the rlsk-free asset and Schallhelm's stock. The following table shows the various portfolio expected return and beta combinations that could be achieved by his portfolio Percentage of Portfolio in Schallheim 096 25% 50% Portfolio Expected Return 6.00% 7.50% 9.00% 10.50% 12.00% 13.50% Portfolico Beta 0.0 0.25 0.50 0.75 1.00 1.25 75 100% 125% What is the reward-to-risk ratio for Schallhelm's stock? O 8.0% 5.0% O 9.00% 9.0% 7.0% 6.0% O Merton Corp, has a hlgher 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 efficlent. O Merton's reward-to-risk ratlo is higher than Schallheim's ratio Merton's reward-to-risk ratlo is the same as Schallheim's ratio O Merton's reward-to-risk ratlo is lower than Schallheim's ratio

Explanation / Answer

The reward-to-risk ratio if given by -

(Expected return - Risk free rate) / Beta

Now, in case Merton Corp. has a higher beta, the denominator of the ratio will increase, thereby lowering the reward-to-risk ratio. (option 3)

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