1.

INTRODUCTION The study of risk and return continues to be an area of vital importance for researchers however the theorizing and empirical findings in this area continue to present a series of problems. The risk-return relationship has been presented in the literature in two distinct ways. The history of the stock and bond markets shows that risk and reward are inextricably intertwined. One does not expect high returns without high risk nor should one expect safety without correspondingly low return. Investors are faced with difficult decisions as they contemplate what assets to invest in. The most important decision that an investor has to make is what assets to invest in and this is a very crucial issue given tfhat one bad decision can have severe repercussions. The investor hence as to take into account the risk and return of the asset of interest in order to make sound and stable decisions about investments. However, understanding the risk and return of assets is not an easy matter. (Leon, Nave and Rubio, 2005). Therefore because one first need to understand the relationship of risk and return and this can be done by understanding economic theory so as to understand how these two terms affect investments. One is the discussion on the literature has been presented by analysing existing literature. Different theories have been discussed and existing empirical evidence had been highlighted in relation to South Africa 2. BACKROUND The relationship between risk and return is a fundamental financial

relationship that affects expected rates of return on every existing asset investment. The Risk-Return relationship is characterized as being a positive relationship meaning that if there are expectations of higher levels of risk associated with a particular investment then greater returns are required as compensation for that higher expected risk. Alternatively, if an investment has relatively lower levels of expected risk then investors are satisfied with relatively lower returns (Fiegenbaum, Hart, & Schendel, 1996). This risk-return relationship holds for individual investors and business managers hence greater degrees of risk must be compensated for with greater returns on investment. Since investment returns reflects the degree of risk involved with the investment, investors need to be able to determine how much of a return is appropriate for a given level of risk. This process is referred to as pricing the risk. In order to price the risk, we must first be able to measure the risk and then we must be able to decide an appropriate price for the risk we are being asked to bear (Fiegenbaum et al, 1996). 3. PROBLEM STATEMENT Investors are faced with difficult decisions as they contemplate what assets to invest in. The most important decision that an investor has to make is what assets to invest in and this is a very crucial issue given that one bad decision can have severe repercussions. The investor hence as to take into account the risk and return of the asset of interest in order to make sound and stable decisions about

investments. However, understanding the risk and return of assets is not an easy matter. This risk-return trade-off is a long standing phenomenon in investments analysis and is the foundation of financial economics (Leon et al, 2005). Therefore because one first need to understand the relationship of risk and return and this can be done by understanding economic theory so as to understand how these two terms affect investments. Therefore this research sought to provide this analysis that would form the background that would help investors understand risk and return by concerning investments in shares and return (Fiegenbaum, et al, 1996). 4. AIM OF RESERACH The aim of this research is to provide a theoretical background into the relationship of risk and return of long term bonds and all share financial index. It sought to do this by understanding the modern portfolio theory that was developed by Harry Markowitz between 1952 and 1959 and other theories whose background was based on the modern portfolio theory such as the Capital Asset Pricing Model, the Arbitrage Model and Tobin Q's Theory. 5. THEORIES OF RISK AND RETURN THE MODERN PORTFOLIO THEORY The modern portfolio theory was developed by Harry Markowitz between 1952-1959. Markowitz formulated the portfolio problem as a choice of mean and variance of a portfolio asset namely holding constant variance, maximise expected return, and holding constant = P i K i is the measure of expected return minimise variance. K The mean return of the investment namely usually follows the formula

. and the return of an asset is measured by the mean return over time. The variance is measure of risk of the investment and is the probability that actual return may differ from expected return and follows the formula (Howell and Bain, 2008).The Modern Portfolio Theory provided a framework for the construction and selection of portfolios based on the expected performance of the investments and risk of the investor. The 2 = Pi ( K i K i ) 2 modern portfolio theory has also been commonly to as referred as mean-variance analysis. The theory sought to describe the behaviour that investors should engage in when they constructing the portfolio (Markowitz, 1999:5-16). The modern portfolio theory provided a framework by specifying and measuring investment risk and developed a relationship between expected asset return and risk. The theory dictated that the given estimates of the return, volatilities and correlations of set of investments and constraints on the investment choices. The modern portfolio theory sought to provide results of the greatest possible expected return for that level of risk or the results in the smallest possible risk for that level of expected return. In Modern Portfolio Theory, the terms variance, variability, volatility, and standard deviation are often used interchangeably to represent investment risk (Markowitz, 1999:5-16). The Importance of theory is that it illuminated the trade-offs between the risk and return and provided a framework on which construction of the portfolio was based on expected performance of the investment and the risk appetite of the investor. The theory

dictated that given estimates of the returns, volatilities, and correlations of a set of investments and constraints on investment choices (for example, maximum exposures and turnover constraints), it was possible to perform an optimization that results in the risk/return or mean-variance efficient frontier. The theory

allowed for the formulation of an efficient frontier from which the investor could choose his or her preferred investment depending on the risk-return/mean-variance preference. The theory also gave insight on how each security co-moved with all other securities i.e. bond versus shares. Co-movements resulted in ability to construct a portfolio that had the same expected return and less risk than one that ignored the interaction between the securities (Howell and Bain, 2008). The theory followed the process of selecting a set of asset classes to obtain estimates of the return and volatilities and correlation by beginning with historical performance of the indexes representing these asset classes. The estimates were used as inputs in the meanvariance optimization. The modern portfolio theory assumed that all estimates are precise or imprecise thus treated all assets equally. Most commonly, practitioners of mean-variance optimization incorporated their beliefs on the precision of the estimates by imposing constraints on the maximum exposure of some asset classes in a portfolio. The asset classes on which these constraints are imposed are generally those whose expected performances are either harder to estimate, or those whose performances are estimated less precisely (Markowitz, 1999:5-16). AN EXAMPLE OF PORTFOLIOS SELECTION

Using an explicit example, it has been illustrated how asset managers and financial advisor used Modern Portfolio theory to build optimal portfolios for their clients. In this example there were two assets namely S A bonds and S A international equity, and this shed some light on the selection of an optimal portfolio (Markowitz, 1991:460-477). These inputs were an example of estimates that were not totally based on historical performance of these asset classes. The expected return estimates were created using a risk premium approach and then were subjectively altered to include the asset manager's expectations regarding the future long-run (5 to 10 years) performance of these asset classes. The risk and correlation figures were mainly historical. This showed the risk/return trade-off that the client faces and attempted to answer the question does the increase in the expected return compensate the client for the increased risk that she will be bearing?. Additionally it was seen that a portfolio that may have not be acceptable to the investor over a short run may have be acceptable over a longer investment horizon. In summary, it is sufficient to say that the optimal portfolio depends not only on risk aversion, but also on the investment horizon (Markowitz, 1991:460-477). Application of mean-variance analysis for portfolio construction required a significantly greater number of inputs to be estimated-expected return for each security, variance of returns for each security, and either covariance or correction of returns between each pair of securities. For example, a mean-variance analysis that

allowed 50 securities as possible candidates for portfolio selection required 50 expected returns, 50 variances of return, and 4975 correlations or covariances. An investment team tracking 50 securities may reasonably be expected to summarize its analysis in terms of 50 means and variances, but it is clearly unreasonable for it to produce 4975 carefully considered correlation coefficients or covariances (Markowitz, 1991:460-477). It was clear to Markowitz (1959:100) that some kind of model of covariance structure was needed for the practical application of normative analysis to large portfolios. He did little more than point out the problem and suggest some possible models of covariance For research one model Markowitz proposed to explain the correlation structure among security returns assumed that the return on the i-th security depends on an "underlying Factor, the general prosperity of the market as expressed by some index". Mathematically, the relationship is expressed as Follows: Ri= i+ iF + ui where Ri= the return on security i; F = value of some index; and ui= error term ( Markowitz,1991:460-477). The expected value of ui is zero and ui is uncorrelated with F and every other uj. Markowitz Further suggested that the relationship needed not be linear and that there could be several underlying Factors. In 1963, Sharpe used the above equation as an explanation of how security returns tend to go up and down together with a general

market index, F. He called the model given by the above equation the market model. It should be noted that the beta for the market model is different from the beta under the capital asset pricing model (Sharpe, 1964). The now widely used value-at-risk framework (VAR) for the measurement and management of market risk for financial markets is based on the concepts first formalized in MPT. The need to consider each security or financial instrument in the context of the overall exposure and not in isolation was the key to obtaining more precise estimates of the day-to-day risks faced by a financial institution, and thereby allowing the institution to keep the VaR within tolerable levels (Markowitz, Gupta and Fabozzi,2002: 7-16). An example may assist in clarifying the impact of correlations on the day-to-day VaR of a financial institution. If a South African -based investor holds a position in a euro-denominated bond, then the investor has exposure to two risk factors:1) interest rate risk that can directly impact the value of the bond and 2) foreign exchange risk (i.e., the volatility of the Euro/RSA exchange rate).But when computing the risk of this position, it is important to keep in mind that the total risk of this position is not simply the sum of the interest rate risk and the foreign-exchange risk, but rather must incorporate the impact of the correlation that exists between the returns on the denominated bond (i.e., the interest rate risk) and the Euro/RSA exchange rate (i.e., foreign exchange risk). Extensive work and research has been done so as to collect more accurate data on the performance of a vast array of financial instruments and

to improve the methods used to compute the estimates of the variances and covariances (Markowitz, Gupta and Fabozzi, 2002: 716). By now it is evident that Modern Portfolio Theory first expounded by Markowitz 50 years ago, has found applications in many aspects of modern financial theory and practice. We have illustrated a few of the most widely used applications in the areas of asset allocation, portfolio management, and portfolio construction. Though it did take a few years to create a buzz, the late 20th and early 21st centuries saw no let-up in the spread of the application of Modern Portfolio Theory. Further, it is unlikely that its popularity will wane any time in the near or distant future. Consequently, it seems safe to predict that MPT will occupy a permanent place in the theory and practice of finance (Markowitz, Gupta and Fabozzi, 2002:7-16). The modern portfolio theory has been extended today to formulate the post modern portfolio theory. In summary it was seen that under the Modern Portfolio Theory, risk was defined as the total variability of returns around the mean return and is measured by the variance, or equivalently, standard deviation. The Modern Portfolio Theory treated all uncertainty the same in that variability) on the upside were penalized identically to surprises on the downside. Therefore the variance was a symmetric risk measure, which was counterintuitive for real-world investors (Rom and Ferguson, 1993:27-33). However while variance captured only the risks associated with achieving the average return, the Post Modern Portfolio Theory sought to recognize that investment risk should be tied to each

investors specific goals and that any outcomes above this goal did not represent economic or financial risk. Post Modern Portfolio Theory downside risk measure made a clear distinction between downside and upside volatility. In Post Modern Portfolio Theory only volatility below the investors target return incurred risk; all returns above this target caused uncertainty which was the riskless opportunity for unexpectedly high returns. In Post Modern Portfolio Theory this target rate of return was referred to as the minimum acceptable return (MAR). It represented the rate of return that must be earned to avoid failing to achieve some important financial objective (Rom and Ferguson, 1993:27-33). CAPITAL ASSET PRICING MODEL Standard asset pricing theory claimed a direct relationship between expected excess stock returns and risk. This risk-return trade-off is a long standing phenomenon in investments analysis and is the foundation of financial economics (Leon, Nave and Rubio, 2005). The rate of return on an investment was weighted by the perceived risk of undertaking such an investment. This implied a direct relationship between market risk and return for the reason that riskaverse investors required additional compensation for assuming extra risk. Markets which were perceived by investors to be high risk were associated with higher returns in order to compensate for the risk involved in investing in such markets. Conversely, lower risk markets were characterised by relatively lower returns. Thus it was unambiguous that the risk-return relationship is a fundamental concept in investment decision making and that it is accepted as

the cornerstone of rational expectations asset pricing models (Levhari and Levy, 1977:92-104). The Capital Asset Pricing Model was developed in the early 1960's by Jack Treynor, William Sharpe, Jan Mossin and John Lintner. The capital asset pricing model was built n the work of harry markowitz of the modern portfolio theory. The modern portfolio theory was also commonly know as the mean-variance model and provided an algebraic conditions on the asset weights in mean-variance efficient portfolios. In its simplest form the theory predicted that the expected return on an asset above the risk-free rate was proportional to the nondiversifiable risk, which was measured by the covariance of the asset return with a portfolio composed of all the available assets in the market. The capital asset pricing model was a static one period model but there have been some intertemporal extension made to it (Levhari and Levy, 1977:92-104). The capital asset pricing model is based on a number of assumptions. It assumed that investors chose assets that they had perceived to be the mean variance efficient and they all that the belief in the expected return variance pair E,V. It model assumed that the risk premium for any asset was linearly related to its covariance and that the asset risk premia was dependent on the relationship of the asset to the whole market and not on the total risk of the asset. Therefore the competitive equilibrium asset earned premia over the riskless rate that increased with the assets risk. The determining influence on the risk premia was the covariance between the asset and the market portfolio. The expected returns

were linearly related to the beta if the market portfolio was the mean-variance (Ross,1977:28-30). The capital asset pricing model concluded that not all risk should affect the asset prices. The investors were risk averse and evaluated their investments portfolios solely on the terms of the expected returns and the standard deviations of the returns that were measures over the same single holding period. Another important factor in the development of the capital asset pricing model was the assumption of the capital markets that they were prefect (Merton, 1973:867-887). This meant that there were no transaction and information costs, information was easily available to everyone, there were no short selling transaction, there were no taxes, assets were infinitely divisible and that investors could borrow and lend at the risk-free rate Additionally investors had access to the same investment opportunities and they made the calculated the estimates of the individual assets expected return,standard deviations of return and correlations among the asset returns (Merton, 1973:867-887). The investors also determined the same highest Sharpe ratio portfolio of the risky asset. The expected return of the asset was given by Es=Rf+B(Em-Ry) and it shows the relationship between expected return and risk that was consistent with investors behaving according to the prescriptions of portfolio theory. Es and Em were the expected return on the asset and the market portfolio respectively, rf was the risk-free rate and the B was the sensitivity of the asset's return to the return on the market portfolio (Perold,

2004:3-24). Example, under the capital asset pricing model to calculate the expected return on the tock one would need to know the premium of the overall equity market (Em) and the stock beta versus that of the market. The stock's risk premium was determined by the component of its return that was perfectly correlated with the market only and the expected return of the asset would not depend on the stand alone risk and that the beta offered a method of measuring the risk of an asset that would not be diversified away. Additionally the stock of the expected return did not have to depend on the growth rate of the expected cash flows hence it was not a requirement that one conduct an extensive financial analysis of the company and forecast the expected future cash flows. Therefore in line with what as been discussed above on the capital asset pricing model one would only need to take into account the beta of the stock and a parameter that would be easy to estimate 2004:3-24). As mentioned in the beginning the capital asset pricing model has undergone several intertemporal extensions such as elimination of the possibility of the risk-free lending and borrowing, allowing for multiple time periods and investment opportunities that change between time periods,extensions to the international investing and having some assets be non-marketable however the most important has been the relaxation of some of the assumptions through employing weaker assumptions by relying on the arbitrage pricing model(Brennan, Wang and Xia, 2004: 1743-1774). (Perold,

THE ARBITRAGE MODEL The Arbitrage Model was formulated by Ross in 1976 and deals s with more than one risk factor and provided theoretical support to the capital asset pricing model discussed above. The arbitrage model was proposed as an alternative to the mean variance capital asset pricing model that had been introduced by Sharpe, Lintner, and Treynor. The Arbitrage Model has become the major analytic tool for explaining phenomena observed in capital markets for risky assets. The Arbitrage Model unlike the modern portfolio theory and the capital asset pricing model is a multifactor risk model instead of the full mean-variance. The arbitrage model is assumptions that arise from the neoclassical school of though of perfectly competitive and frictionless asset markets and its main foundation is the assumption of return generating process where individuals homogeneously assumed that the random returns on the set of assets was ruled the k-factor generating model of the form rt=Ei+ bi11 + ***+ bik k +i i-l, ..., n. (Ross, 1980:1073-1103) The first term Eit, was the expected return on the i-th asset. The next k terms were of the form b i11, where denoted the mean zero j-th factor common to the returns of all assets under consideration. The coefficient bi1 quantified the sensitivity of asset i's returns to the movements in the common factor. The common factors captured the systematic components of risk in the model. The final term i is a noise term which represented an unsystematic risk component,

idiosyncratic to the i-th asset. The Arbitrage Model was also based on two main assumptions of no arbitrage opportunities in the capital market and that there was linear relationship between the actual returns and the k common factors. The expected returns were linearly related to the weights of the common factors in the assumed linear process and the that factor analysis was used to extract the k factors from the sample covariance matrices and then to test the hypothesis by the regressing returns on the average returns against the factor amplitudes of the common factors (Trzcinka, 1986:347-368). One of the models used that shows the basic relationship that had to be estimated in the multifactor model was Ri- Rf= i, F1RF1+ i, F2RF2+ ...i, FHRFH+ ei where Ri= rate of return on stock i; Rf= risk-free rate of return; i, Fj= sensitivity of stock i to risk factor j; RFj= rate of return on risk factor j; and ei= non-factor (specific) return on security i.(Ross, 1980:1073-1103) This model is called the Barra fundamental factor model and it used the industry attributes or market data called descriptors that were not risk factors but candidates for the risk factors selected based on their ability to explain the returns. The descriptors were potential risk factors that were statistically significant so that they be grouped together as risk indices that captured the related industry attributes. The model used the market

index as a benchmark and variance was a tracking error that measured the risk exposure and not the risk itself. This therefore shows that the arbitrage model allowed for the generations of more than one factor and demonstrates that every equilibrium would be characterised by the linear relationship between each assets ex[expected return and its returns response magnitude on the common factors since every market equilibrium was consistent with no arbitrage profits (Ross, 1980:1073-1103). TOBIN Q THEORY Tobin contribution to the theories is the addition of the risk-free rate to the risky assets. James Tobin (1969) introduced the ratio of the market value of a firm to the replacement cost of its capital stock and he called the Q which sought to measure the incentive to invest in capital. Tobins Q, was the empirical implementation of Keyness notion that capital investment became more attractive as the value of capital increases relative to the cost of acquiring the capital (Abel and Eberly, 2008: 2-30). The q ratio was defined as the market value of the company's assets that is divided by assets replacement cost. This q ratio is also known as the average q (Richard and Weston, 2008: 1-12). The Q ratio is therefore the ratio of the market valuation of real capital assets that can be reproduced to the current replacement costs of those assets and follows the formula q = MV/V (Tobin and Brainard, 1977). I f the Q ratio is greater than 1 then the investment is pursued because the capital is more highly valued than the cost to produce it in the market. However if the Q ratio is less than 1 then it would mean that the

investment would be forgone because it would be cost more to replace(Brainard and Tobin, 1968:99-122). The market valuation represents the present value of the expected return in which the real rate of return gives the discount rate . The replacement cost is the sum of the present of expected returns that are discounted by the marginal efficiency of the capita (Mollick And Fariaa, 2010:401418). EXISTING EMPIRICAL ANALYSIS Although it is a long standing phenomenon in investments analysis, the empirical evidence on the risk-return trade-off is ambiguous or negative with some empirical studies documenting a weak

relationship at best. The paper by Leroi Raputsoane examined the intertemporal risk and return relationship in South Africa. This study by Raputsoane examined the intertemporal risk-return relationship in the South African stock market based on single factor intertemporal capital asset pricing model framework. The GARCM-M model by Engle, Lilien and Robins was used to estimate the riskreturn trade-off of 50 daily excess returns of market and industry stock price indexes of the Johannesburg stock exchange listed companies (Raputsoane, 2009:3-13). According to the empirical results, 95 percent of stock price indexes show a positive and a highly statistically significant coefficient of risk aversion, while 5 percent are not only statistically insignificant but also show negative coefficient of risk aversion. This suggests that, generally, the market and industry stock prices in the South African stock market conform to the Mertons Intertemporal Capital Asset Pricing Model theoretical

hypothesis of a positive relationship between excess market returns and the market risk premium (Raputsoane, 2009:3-13). Raputsoane analysed the stock markets and investigated this relationship by making use of the Merton single factor intertemporal capital asset pricing model framework. He assumed that investors were risk averse and processed to conclude that according to shape there is a positive linear relationship between the expected market risk and returns. As was discussed above the Capital asset pricing model implied a positive linear relationship between the market return and the market risk premium ans assumed that investors had the power utility and that the rates f return were independent and identically distributed (Raputsoane, 2009:3-13). This assumption is applied to the intertemporal capital asset pricing model. Raputsoane assumes that the relative risk averse is constant ans that investment opportunities are slow-moving or inactive hence they have a constant impact on the stock returns in the short term. This assumption meant that the hedge component could be excluded and that there was need to use high frequency data so as to uncover the risk-return relationship[ precisely (Raputsoane, 2009:3-13). Therefore the intertemporal capital asset pricing model was a single factor model where the conditional variance was directly related to the conditional excess return in the market and allowed for better measurement of the risk by producing better estimates of the conditional volatility process and thus enabled the risk-return trade-

off to be identified precisely. Raputsoane (2009) carried out his research by estimation through the use of daily returns on 50 industry and market share price index of the Johannesburg stock exchange listed companies where the share prices indexes were weighted by the capital capitalisation (Raputsoane, 2009:3-13). He also used the bond exchange yields on the short tern government bond and the long term government bond to approximate the risk free rate of the interest. According to the descriptive statistics, consumer goods, food producers, equity investments, development and venture capital stock price indexes showed a high volatility during the sample period based on standard deviations (Raputsoane, 2009:3-13). Henceforth in summary, Raputsoane concluded that the empirical evidence on risk-return relationship as obtained by the ICAPM was ambiguous with some empirical studies documenting a weak or negative relationship at best. However despite this the estimated results generally supported the robust positive risk-return relationship between expected returns and the market risk premium in the South African stock market (Raputsoane, 2009:3-13). In another article the VaR model is used to show that asset return predictability has important effects oon the variance of long term returns of shares and bonds by analysing the correlation structures of the shares and bonds return across investment periods.) to hight the relevance of the risk horizon effects on the asset allocation the mean-variance analysis was used .The mean-variance analysis focused on short-term expected returns and risks and was extended

to take into account multi-horizon setting (Campbell and Viceira, 2002:34-44). The model of return dynamics showed that commonly used return forecasting variables had a substantial effect on the asset allocation and that the effects worked through the term structure of the risk-return trade-off. Campbell and Viceira (2002:3444) used American treasury bonds and American stock to characterise the term structure of the risk so as to show that the variance and correlation of the returns of the assets changes dram by the investment time period due to changes in factors such as share market risk, inflation risk and real interest risk at different time periods. Campbell and Viceira (2005: 20-30), based on their return-forecasting model, have concluded that long-horizon returns on stocks were significantly less volatile than their short-horizon returns. However for bonds, they concluded that bonds real return volatility increased with the investment horizon. This could have been attributed to the fact that shares rick estimated standard deviations were considerably larger than the bond risk estimated standard deviation whilst the mean risk of bonds and shares had different signs. Therefore this meant that bond and shares returns will move in opposite directions in future periods (Campbell and Viceira, 2005: 20-30) and (Campbell, 1987: 373-399).

6. CONCLSUION The Modern Portfolio Theory defined risk as the total variability of the returns around the mean return and the risk is measured by the

variance or standard deviation. It treated all uncertainty the same whether on the upside or the down side therefore the variance is an symmetrical risk measure. The variance under the modern portfolio theory takes only into account the risk that are associated with achieving the average return. However under the Post Modern Portfolio Theory the down side risk measure clearly distincts the downside volatility form the upside volatility. In Post Modern Portfolio Theory the target rate of return is referred to as the minimum acceptable return and it represents the rate of return that must be earned to avoid failing to achieve some important financial objective (Rom and Ferguson, 1993:27-33). In the capital asset pricing model the return is linearly related to the systematic risk and the market does not pay for any risk that is unsystematic because it can be avoided through diversification. It was also shown that the beta was the measure of the systematic risk. The assumptions under which the capital asset pricing model was developed was that investors seek to maximise their wealth utility and are risk averse (Fama and French, 2004:25-46). Information is readily available and costless, there are no taxes, no transaction costs and that all assets are divisible. Investors are homogeneous in their expectations regarding expected return and expected risk of the assets and that they face similar time periods. Additionally investors borrow and lend at risk-free rates and that the capital market is in equilibrium (Fama and French, 2004:25-46). Furthermore it was seen that under the Arbitrage Pricing Theory the most important assumption was that K factors generate security

returns.

this

assumption

is

equivalent

to

assuming

that

eigenvalues of the covariance matrix of returns increased as the number of securities increased. The theoretical relationship between eigenvalues and the number of securities provided a natural method for estimating the number of factors in the APT (Trzcinka, 1986:347-368). The Tobin Q theory looked at maximisation of the present net worth of the business and the market value of outstanding stock. Investments were done on the basis that there would be increase stock value in relation to the expected contribution to the future earnings of the business and risk (Yoshikawa, 1980:739-743). The q therefore was a representation of the ratio of the businesses stock to the replacement of the businesses physical assets. Hence if the investors q value was greater than 1, then additional return would be expected because the cost of the firms asset will be less than the profits generated and hence the investor would have invested in assets. However if the q value is less than 1 then an investor will not invest in any assets because the profits would be less than the cost of the businesses assets (Yoshikawa, 1980: 739743). The different theories above all explain the risk and return relationship that exits. Therefore the aim of this research next will be to conduct an empirical analysis of this relationship. The data that will be used will be the south African 3 month treasury bills, the long term government bonds and the Johannesburg financial share index. The methodology is thus one of descriptive statistics and will

include calculating variables such as the mean and variance , the expected mean and expected variance and to find out risk-return relationship of each asset and the covariance.