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Risk and Return in General: Theory and Evidence

150 Pages Posted: 18 Jun 2009 Last revised: 22 Nov 2011

Eric G. Falkenstein

Pine River Capital Management

Date Written: June 15, 2009


Empirically, standard, intuitive measures of risk like volatility and beta do not generate a positive correlation with average returns in most asset classes. It is possible that risk, however defined, is not positively related to return as an equilibrium in asset markets. This paper presents a survey of data across 20 different asset classes, and presents a model highlighting the assumptions consistent with no risk premium. The key is that when agents are concerned about relative wealth, risk taking is then deviating from the consensus or market portfolio. In this environment, all risk becomes like idiosyncratic risk in the standard model, avoidable so unpriced.

Keywords: Risk and Return, CAPM, APT, Asset Pricing Theory, Utility Theory

JEL Classification: D01, D81, G11, G12

Suggested Citation

Falkenstein, Eric G., Risk and Return in General: Theory and Evidence (June 15, 2009). Available at SSRN: or

Eric G. Falkenstein (Contact Author)

Pine River Capital Management ( email )

601 Calson Parkway, Suite 330
Minnetonka, MN 55347
United States
6123091588 (Phone)
6123091588 (Fax)

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