<p>I'm talking about bonds, stocks, and the sort.</p>

<p>I understand that an individual investor that's planning to invest, say, 50% of his savings, may require a higher expected gain to go for a riskier investment.</p>

<p>However, if risk can be diversified away, wouldn't people with enough money, even if they are risk averse, choose the investment opportunities with highest expected value and diversify among them? Wouldn't then any investment with higher-than-average expected value be flooded with money until they almost don't pay more?</p>

<p>Is it that...</p>

<ol>
<li>most risky investment options are too correlated to allow for almost all of the excess risk to dissolve?</li>
<li>risk premiums only happen in markets with limitted access or that don't work like the ideal 101 market in a relevant way?</li>
<li>some other reason?</li>
</ol>

CC BY-SA 4.0
2019-02-23T18:57:40.823Z
I don't fear math, on the contrary. However, I don't have a formal economics background so I appreciate more, if possible, answers that don't build on a lot of previous technical mathy concepts. If it's inevitable, then I'm still interested in good answers.
Woe
CC BY-SA 4.0
2019-02-23T19:10:09.870Z
Cross-posted on [Reddit](https://old.reddit.com/r/AskEconomics/comments/attr74/risk_premiums_why/) and I thought I wasn't getting an answer so I tried here, but apparently there was one I couldn't see until now.
Woe
<investment><risk>
Why do riskier investments pay more?
Woe
# Why do riskier investments pay more?

(Asked by: username_0 on 2019-02-23)

I'm talking about bonds, stocks, and the sort.

I understand that an individual investor that's planning to invest, say, 50% of his savings, may require a higher expected gain to go for a riskier investment.

However, if risk can be diversified away, wouldn't people with enough money, even if they are risk averse, choose the investment opportunities with highest expected value and diversify among them? Wouldn't then any investment with higher-than-average expected value be flooded with money until they almost don't pay more?

Is it that...

1. most risky investment options are too correlated to allow for almost all of the excess risk to dissolve?
2. risk premiums only happen in markets with limitted access or that don't work like the ideal 101 market in a relevant way?
3. some other reason?

**Tags:** investment, risk

> **Comments:**
> **username_0**: I don't fear math, on the contrary. However, I don't have a formal economics background so I appreciate more, if possible, answers that don't build on a lot of previous technical mathy concepts. If it's inevitable, then I'm still interested in good answers.  
> **username_0**: Cross-posted on [Reddit](https://old.reddit.com/r/AskEconomics/comments/attr74/risk_premiums_why/) and I thought I wasn't getting an answer so I tried here, but apparently there was one I couldn't see until now.  

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## 0 answers

