CAPM predicts that a security's risk premium increase in proportion to its beta of the security, not its volatility. Justify this statement using Figures 10.6 and 10.7 in Chapter 10

Figure 10.6 The Historical Trade Of Between Risk and return in Large Portfolios 25% Small Stocks 20% Mid-Cap Stocks 15% S&P 500 Historical Average Return 10% Corporate Bonds World 8.5% historical excess return Portfolio of S&P 500 over Tils 5% Treasury Bills 09 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Historical Volatility (standard deviation) Note the general increasing relationship between historical volatility and average return for these large portfolios. In addition to the portfolios in Figure 10.1, also included is a mid-cap portfolio composed of the 10% of U.S. stocks whose size is just above the median of all U.S. stocks. (Data from 1926-2014.) Source: CBSP. Morgan Stanley Capital International Figure 10.7 Historical Volatity and return for 300 individual Stocks, Ranied Annuaily by Size 25% A stocks 1-50 = stocks 51-400 = stocks 401-500 Smal Stocks 20% Mid-Cap Stocks 15% S&P 500 Historical Average Return 10% Corporate Bonds World Portfolio Treasury Bills 0% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Historical Volatility (standard deviation) Unlike the case for large portfolios, there is no precise relationship between volatility and average return for Individual stock. Individual stocks have higher volatility and lower average returns than the relationship shown for large portfolios. (Annual data from 1926-2014.)