When considering stock and bond valuation models,we implicitly assume that the marginal investor is risk averse,which means that he or she requires a higher rate of return for a given level of risk than a risk neutral individual,other things held constant.

Question

Quizplus · Accepted Answer

The statement accurately describes the assumption made in stock and bond valuation models. Marginal investors are typically assumed to be risk averse, meaning they require a higher rate of return in exchange for taking on greater risk. This assumption helps to explain why certain investments may be priced higher or lower based on their perceived level of risk.

When Considering Stock and Bond Valuation Models,we Implicitly Assume That