MEPX
Chapter 2 of 10All chapters
  1. 1What risk means
  2. 2The trade-off
  3. 3Kinds of risk
  4. 4Measuring risk
  5. 5Time and sequence
  6. 6Diversification
  7. 7Risk as experienced
  8. 8Reducing risk deliberately
  9. 9Risk beyond investing
  10. 10Deciding how much to take

Chapter 2 of 10

The trade-off

Why the extra return exists.

Compensation

Investors demand more expected return to hold something unpredictable. That premium is a price set by preferences, not a law, and it can fail to appear for a decade.

  • Expected does not mean guaranteed, and averages hide long droughts.
  • If something appears to offer return without risk, the risk is hidden or the offer is false.

Historical figures

Long-run averages come from a particular sample of history, mostly from countries that did well. Survivorship affects even the data used to set expectations.