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Subject:  Re: Joseph Schumpeter on Risk Date:  2/11/2002  11:58 AM
Author:  galagan Number:  162 of 297

The compensation for greater risk is only apparently a greater return: it has to be multiplied by a probability coefficient, whereby its real value is again reduced -- and indeed exactly by the amount of the surplus.

This statement assumes that market prices are based on risk-neutral valuations. In a world with a predominance of risk-averse participants, the compensation for greater risk will be larger than the expected value of losses from taking on the risk, and this statement will be incorrect.

The main point - that you can't expect to keep all of the higher returns on riskier investments - is true, and much neglected.

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