As the risk of an investment increases, the expected return must also increase in order for risk-averse individuals to participate in the investment.

Question

Quizplus · Accepted Answer

This is the principle of risk-return tradeoff, which states that investors demand a higher return for taking on higher levels of risk. This is because risk-averse individuals require compensation for the possibility of losing their investment.

As the Risk of an Investment Increases, the Expected Return