As investors become more pessimistic (risk averse):

Question

Quizplus · Accepted Answer

When investors become more risk averse, they require a higher expected rate of return to compensate for the increased risk. This means that securities will need to have lower prices in order to generate this higher return. Therefore, prices of securities fall in order to raise their expected rate of return. Choice (A) is incorrect because when investors become more risk averse, they require larger premiums for taking on risk, not smaller premiums. Choice (B) is incorrect because larger betas indicate higher risk, which would not be attractive to risk-averse investors. Choice (D) is incorrect because investing in a high beta portfolio would also not be attractive to risk-averse investors.

As Investors Become More Pessimistic (Risk Averse)