Perhaps the most basic principle of modern financial theory revolves around the concept that risk andexpected returns are related. For example, stocks are riskier than one-month Treasury bills and because they entail more risk, the only logical explanation for purchasing stocks is that they must provide a higherexpected return. However, if stocks always provided higher returns than one-month Treasury bills, then investing in them would not actually be riskier, and hence there would be no risk premium.
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