Question: Suppose there is an asset class with a standard deviation that lies about halfway between the standard deviations of stocks and bonds. Based on Figure,

Suppose there is an asset class with a standard deviation that lies about halfway between the standard deviations of stocks and bonds. Based on Figure, what would you expect the average return on this asset class to be?

The figure indicates that a positive relationship exists between the average returns offered by an asset class and the standard deviation of returns. Average Return (%) 14 12 10 Stocks 8 Source Triumph of the Optimists by Elroy Dimson, Paul Marsh, and Mike Staunton, in Global investment Returns Yearbook 2007 Published by ABN AMRO, London. Updates provided by Dimson, et al. Reprinted with permission. 6 Bonds Bills 4 2 0 0 5 15 20 25 Standard Deviation (%)

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