For a risk averse investor, other things held constant, the higher a security's risk, the higher the return investors demand, and thus the less they are willing to pay for the investment.

Question

Quizplus · Accepted Answer

This statement is consistent with the principle of risk-return tradeoff, which states that investors require higher returns for taking on higher levels of risk. Risk averse investors are particularly sensitive to this tradeoff and prefer investments with lower risk and lower returns. Therefore, if other factors remain constant, the higher the risk of a security, the higher the return investors will demand to compensate for the added risk, and the less they will be willing to pay for the investment.

For a Risk Averse Investor, Other Things Held Constant, the Higher