If world events cause investors to become more risk-averse, we would expect the market risk premium to increase.

Question

Quizplus · Accepted Answer

When investors become more risk-averse due to world events, they demand a higher return for taking on the same level of risk, leading to an increase in the market risk premium. This premium is the additional return over the risk-free rate that investors require to compensate them for the risk of investing in the stock market.

If World Events Cause Investors to Become More Risk-Averse, We