Question: Explain why the dots in Figure appear to be almost randomly scattered. In contrast to the positive relationship between average returns and standard deviations for

Explain why the dots in Figure appear to be almost randomly scattered.

In contrast to the positive relationship between average returns and standard deviations for assest clases shown previously in Figure 6.6, this figure shows no such pattern for individual assets. There is no obvious tendency for the stocks that have earned the highest returns to be the most volatile. This suggests that for an individual stock, standard deviation may not be an appropriate measure of that stock's risk because it is unrelated to the stock's returns. Average Return (%) 25.0% e Wal-Mart 20.0% Anheuser- Busch 15.0% American Airlines 10.0% Archer Daniels Midland 5.0% 0.0% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% Standard Deviation (systematic unsystematic risk)

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