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How can risk-reward relationship exist, since the losses due to the risk should offset the reward?
In an "efficient" investment market the amount of risk premium would EXACTLY offset the likelihood of loss, such that over long time frames the expected return on investment would be equal for all investment options.  In practice, we usually see that riskier investments yield a higher long-term return because the risk premium is larger than that "efficient" amount. This is because many investors don't have a long-term time horizon, and the pain of loss is greater than the reward of gain ("asymmetric preferences"). It's also important to think about the risk-reward interaction as being PERCEIVED risk to EXPECTED reward.  If I'm lending money to somebody who is likely not to pay me back, I'd want a better deal than if I were lending to somebody who is certain to pay. I think that addresses your confusion, but if I misinterpreted what's puzzling you, please let me know and I