If you listen to the first 20 seconds of this clip, you'll hear a simple proposition about risk and return from a top-rate finance professor, John Geanakoplos. The problem is, though it isn't really clear, he is talking about a risk akin to a default rate, and a return like a stated yield.  It's not really central to this particular lecture, but its the kind of throw-away assertion that highlights experts take the risk premium for granted, even though it's as common as a jackalope for your average investor.

 

Stephen Cecchetti’s textbook Money, Banking, and Financial Markets also presents the seemingly straightforward example of how bonds with higher default rates have higher yields: risk and expected return are positively correlated. Yet this is purely an anticipation of the default rates so is not risk in the sense of something priced. BBB bonds have, over time, the same total return as B-rated bonds, in spite of the fact that yields for B-rated bonds are always higher than for BBB-rated bonds. One must subtract the expected defaults and the resulting losses from a stated yield regardless of one’s risk tolerance. Confusing stated yield with return is a simple, obvious error. This is the kind of rationalization people make when they are certain their big picture is correct. The distinction between the amortized expected loss from defaults and priced risk is a fundamental distinction in modern risk-return theory. The usage of expected loss risk as opposed to 'risk premium' risk when it generates intuitive support at 30,000 feet suggests that financial professionals have a strong, active bias toward the big idea: risk begets average returns.