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Multi-Asset Investing: A practical guide to modern portfolio management by Yoram Lustig

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5. The relationship between reward and risk

Investors do not want risk but they must accept it. Some accept more risk than others, depending on their risk appetite. Logically, investment risk should be compensated. Had risk not been compensated by markets, investors would have not taken it. If cash and equities had the same return, there would have been no reason to invest in equities instead of cash.

Intuitively, the higher the risk, the higher the expected return. Historically, over long time periods, this rule normally stands and taking risk has been compensated by the market. Small capitalisation equities generated higher returns than large capitalisation equities, which generated higher returns than corporate bonds, which generated higher ...

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