Why Risk is Not Related to Return

34 Pages Posted: 2 Apr 2007 Last revised: 12 Dec 2014

Date Written: February 28, 2007

Abstract

This paper argues that in general risk is not empirically correlated with returns in any obvious way. This puzzle is explained as the implication of a utility function in which if people care only about relative wealth, risk is a deviation from what everyone else is doing, and therefore becomes avoidable and unpriced, similar to diversifiable risk in the Capital Asset Pricing Model (CAPM). Using a utility or arbitrage argument, a relative status utility function creates a zero risk-return correlation via a market model that implies a zero risk premium, and has other applications.

Keywords: risk premium, CAPM, relative status

JEL Classification: D01, D81, G11, G12

Suggested Citation

Falkenstein, Eric G., Why Risk is Not Related to Return (February 28, 2007). Available at SSRN: https://ssrn.com/abstract=976652 or http://dx.doi.org/10.2139/ssrn.976652

Eric G. Falkenstein (Contact Author)

Pine River Capital Management ( email )

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

Register to save articles to
your library

Register

Paper statistics

Downloads
914
Abstract Views
4,972
rank
24,328
PlumX Metrics