Explain why the dots in Figure appear to be almost randomly scattered. In contrast to the positive
Question:
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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The dots in Figure appear to be almost randomly scattered because these dots represe...View the full answer
Introduction to Corporate Finance
ISBN: 978-0324657937
2nd edition
Authors: Scott B. Smart, William L Megginson
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Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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