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2. A colleague at work has done some research on investing. Based on his research, he claims that stocks' average returns have no connection to
2. A colleague at work has done some research on investing. Based on his research, he claims that "stocks' average returns have no connection to their risks". As proof of his point he points to the following two stocks: Stock HML Computer Sciences SMB Enterprises Annual Std. Dev. 51.2% 21.3% Annual Average Return 6.8% 12.8% HML, he says, is much more volatile than SMB Enterprises. Despite this, SMB Enterprises has a much higher average return. Your colleague says that this is evidence that the stock market is completely irrational and therefore creates big opportunities for people, like him, who 'really understand' risk. You may assume that your colleague's numbers were correctly computed, with no computation errors. a. Is your colleague correct that a stock with a higher total risk should necessarily have a higher expected return? Why or why not? b. Suppose your colleague suggests that you should not invest in HML because it is 'way too risky for the amount it provides in average returns'. Is this reasoning
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