When compared with other investments, stocks have a higher rate of return over a long period of...

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When compared with other investments, stocks have a higher rate of return over a long period of time. Discuss the trade-off between risk and reward. Discuss the benefits of asset allocation.

Monali · Accepted Answer

When compared with other investments, stocks have a higher rate of return over a long period of time. Discuss the trade-off between risk and reward. Discuss the benefits of asset allocation.
We first look for general equilibrium model used for determining relevant measure of risk for any asset and relationship between expected return and risk for any asset when market is in equilibrium. Despite stringent assumptions of Capital Asset pricing Model (CAPM), gives good results for price in capital market. 
Based CAPM assumptions, apply two mutual fund theorem which states that all investors hold combination of two portfolio. One portfolio is market and other is riskless security as investor will be satisfied with market fund in addition to ability to borrow / lend at riskless security. 
Below is Risk and Return. All investor will have portfolio on straight line,

When compared with other investments, stocks have a higher rate of return over a long period of time. Discuss the trade-off between risk and reward. Discuss the benefits of asset allocation.

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