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Risk and return go hand in hand as companion variables central to the teaching and practice of economics and finance. Standard theory and common sense both dictate that high risk assets should offer higher returns than low risk ones. Yet studies of long-run equity and bond returns across all major securities markets have repeatedly shown the opposite to be true. Only some widespread and deep- rooted malfunction could account for an inversion of this basic relationship on such an extraordinary scale. We report a new theoretical explanation based on the commonplace practice of benchmarking asset managers' performance to a market cap index.
