1. Which of the following statements regarding risk-averse investors is true?a.They accept investments that are fair games.b.They only care about the rate of return.c.They are willing to accept lower returns and high risk.d.They only accept risky investments that offer risk premiums over the risk-free rate.
Question
- Which of the following statements regarding risk-averse investors is true?a.They accept investments that are fair games.b.They only care about the rate of return.c.They are willing to accept lower returns and high risk.d.They only accept risky investments that offer risk premiums over the risk-free rate.
Solution
The correct answer is d. Risk-averse investors only accept risky investments that offer risk premiums over the risk-free rate.
Here's why:
a. Risk-averse investors do not accept investments that are fair games. A fair game in investment is one where there is an equal chance of winning or losing, but risk-averse investors prefer certain outcomes and would avoid such games.
b. While the rate of return is important, risk-averse investors also care about the risk associated with the investment. They would not invest in a high return investment if it also comes with high risk.
c. This statement is incorrect because risk-averse investors are not willing to accept high risk, even if it comes with high returns. They prefer investments with lower risk.
d. This is the correct statement. Risk-averse investors require a risk premium for investing in risky assets. This means they expect to earn a higher return on risky assets to compensate for the additional risk they are taking on.
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