Which of the following statements is correct?
A) Risk aversion implies that some securities will go unpurchased in the market even if a large risk premium is paid to investors.
B) When investors require higher rates of return for investments that demonstrate higher variability of returns,this is evidence of risk aversion.
C) Risk aversion implies a general dislike for risk,thus,the lower the expected return the higher the risk premium.
D) In comparing two firms that differ from each other only with respect to risk,the expected returns on the stock of the firms should be equal.
E) None of the above statements is correct.

Question

Quizplus · Accepted Answer

The statement correctly identifies that when investors require higher rates of return for investments with higher variability, it is evidence of risk aversion. Option A is incorrect because risk aversion implies that investors are willing to pay a higher price for securities with lower risk, rather than let them go unpurchased. Option C is incorrect because while risk aversion implies a dislike for risk, it also implies a willingness to be compensated for taking on risk. Option D is incorrect because the expected returns on the stock of the firms should not be equal if they differ only with respect to risk.

Which of the Following Statements Is Correct