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JAFO,

And eventually Mike Milliken went to jail, too.

His jail 'event' was not an indication that junk bonds had higher premiums then they needed for the risks being taken. Both are facts and largely unrelated.

I agree with pretty much everything else you said. The summary to your post seems to be that the risk premiums shift for different reasons and size of market or liquidity (related I know) does influence a lot the returns.

As to six sigma. I do not know the math but you are heading in the right direct. The tail is long and the area under the curve is small. What the prices show normally are fat tails in that the prices do not follow what the theoretical curve implies. Friction in the marketplace and human nature to mis-price rare events.

There is a great book on the topic. The title if Fooled by Randomness by Nassim Taleb.

John
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