The principle of finance that "lower returns are expected for taking on less risk" implies that rational investors would choose a risky investment only if they feel the expected return is high enough to justify the greater risk.

Question

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The principle of finance states that investors are compensated for taking on greater risk with higher expected returns. Therefore, rational investors would only choose a risky investment if they believe the potential return justifies the increased risk.

The Principle of Finance That "Lower Returns Are Expected for Taking