Question

"How does the relationship between the average return and the historical volatility of individual stocks differ from the relationship between the average return and the historical volatility of​ large, well-diversified​ portfolios?"

Answer 1

The relationship between the average return and historical volatility differs between individual stocks and well-diversified portfolios, with individual stocks having higher volatility. Well-diversified portfolios, on the other hand, tend to have lower volatility due to the mitigating effect of diversification.

Step-by-step explanation:

The relationship between the average return and the historical volatility of individual stocks is different from the relationship between the average return and the historical volatility of large, well-diversified portfolios.

Individual stocks tend to have higher historical volatility compared to well-diversified portfolios. This is because individual stocks are more susceptible to idiosyncratic risks, such as company-specific news or events, which can result in larger fluctuations in stock prices.

In contrast, well-diversified portfolios contain a mix of different stocks, which helps to reduce the impact of idiosyncratic risks. As a result, the historical volatility of well-diversified portfolios is generally lower than that of individual stocks.

Answer 2

Answer: Relationship between Individual Stock average return and historical volatility is insignificant but is strong for Portfolios

Step-by-step explanation:

The relationship between the average return and the historical volatility of individual stocks has been found to consistently be POSITIVE BUT INSIGNIFICANT for the majority of markets that were sampled.

The relationship between the average return and the historical volatility of​ large, well-diversified​ portfolios on the other hand have been shown to have a STRONG POSITIVE RELATIONSHIP. That means that Portfolios with higher returns usually have higher volatilities as well.

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