Risk and Return Revisited

0 ne time-honored rule in the field of finance is that risk and return are related. Often called the “no free lunch” principle, it asserts that over the long run it is not possible to achieve exceptional returns without accepting substantial risk. Any standard equilibrium model of asset pricing justifies ths relationship. Data from Ibbotson Associates confirm that since 1926, U.S. common stocks have provided a total return of 10.7% per year, about seven percentage points greater than the return from riskless Treasury bds.