Yes, but EMH says that the lower price is compensated for by the higher risk.GregLee wrote:Right. It's priced in by charging less for the asset than would be charged for a less risky asset. Your reward for taking the extra risk is the increase in the difference between your returns from the asset and the lower price you paid for it.plnelson wrote: Thus any additional potential gain from a "higher risk" asset is already priced in.
Look at it this way. Suppose we have 2 asset classes, A and B. B has a higher risk than A so it is priced lower. I claim that the lower price is exactly compensated-for by the higher risk so there's no net advantage.
But let's suppose that I am initially wrong, let's suppose that B is priced 20% lower but only had 10% higher risk. If that were the case then a mutual fund could exist that could consistently "beat" A by just investing in assets of class B. As the (efficient) markets "digested" this information then demand for B would increase, driving up its price until it no longer had an advantage.
As I said above, if there really was a risk premium greater than the risk itself (e.g., a 20% premium for a 10% risk) then it would be possible to create a mutual fund that, over the long run would beat broad market indices. But this is not the case empirically, which is why we're on Bogleheads.
That's why I say the single most important investing belief is that you cannot predict the future movement of markets, because that would violate EMH.