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The risk-free rate is 2%; Stock A's expected return is 8% and its beta is 1.2; Stock B's expected return is 7.5% and its beta is .89. Which stock has a better risk-adjusted returns?

Respuesta :

Answer:

Stock B has better stock adjusted returns

Explanation:

We can compare the risk-adjusted returns of two stocks by calculating the Treynor ratio.

Treynor ratio formula = (Stock return - risk free rate) / Stock beta

stock A = (8% - 2%) / 1.2 = 0.05

stock B = (7.5% - 2%) / 0.89 = 0.0618

Stock B has better stock adjusted returns

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