Does Greater Risk Mean More Reward

It has frequently been said that greater risk means more reward, but does this ratio of reward to risk always hold true.

U.S. Bancorp probably the safest bank in the United States in terms of exposure to risky assets and the amount of capital on their books, declined to $8.82 during the heart of the recession, the stock has since moved up by 215%. One could have boughten Warner Music Group instead and quadrupled ^10 the amount of risk. Yet the return would have been approximately the same from its recessionary low. Coincidently one could buy the same two stocks now and likely get a way higher return in U.S. Bancorp with again no risk compared to that of WMG.

Or one could have bought Eastman Kodak and made 28% from the March low with an excessive amount of risk. The idea of buying a company which is posting -20% revenue declines. One could have bought Caterpillar at $23 which had no risk and has made made 340% since its low.

Obviously there is some merit to the underlying belief that the more risk you take the more amplitude one will see in the variation of their gains and losses.

But this has to be one of the most overused ideas by investors. The idea in believing that the only way one can beat the market is by taking more risk or by being lucky.

The key to investing is finding stocks with no risk and high reward. A 1 to 0 ratio of reward to risk or undefined is most optimal.

These can be found fairly easily today in the U.S. Financial world. Where some U.S. Banks still trade at a large discount to their risk compared to similar companies with more risk.