Expected (mean) Return 4. CAPM describes risk-return relation as a straight line in x-y plane (x for risk, measured by either Beta or standard deviation; y for expected return), whereas the real data of individual stocks in the graph below shows scatter plot in the same x-y plane (y for mean monthly return, x for standard deviation of monthly returns). Risk and Return of Individual Stock, 2005-2015, Monthly IN 34.0% Risk (standard deviation) Assume that CAPM holds true for all these individual stocks. 4 data points of individual stocks are known as follows: GOOG (9.1%, 2.0%), TIF (10.1%, 1.2%), AMZN (11.5%, 2.7%), MCD (4.6%, 1.1%). Risk-free rate is 0.2% (monthly rate). Additionally, GOOG is known to have a systematic risk of 5.4% (measured in Std Dev). 1) Find the systematic risk of TIF, AMZN, and MCD. 2) TIF vs GOOG, which must have a lower unsystematic risk? Explain. Now you should see why the 4 data points (and many more points in general) are not on an exact straight line. Explain 3) Why are individual stocks not on a straight line? 4) If you were to place the CAPM straight line in the graph, where do you put it?