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Most investors are risk averse which means____________.
Answer & Solution
Correct Answer:
Option
C
Most investors are risk averse which means they avoid the stock market due to the high degree of risk. A risk-averse investor, on the other hand, dislikes risk and, thus, stays away from high-risk stocks or investments and is prepared to forego higher rates of return.
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LoginUnderstanding Risk Aversion
Risk aversion is a concept in finance and economics describing the behavior of investors who, when faced with two investments with the same expected return, will choose the one with the lower risk.
It means that an investor:
Dislikes uncertainty (risk).
Requires extra compensation (a higher expected return, known as the risk premium) to accept an increase in risk.
Therefore, a risk-averse investor does not avoid risk entirely (B and C are incorrect), but instead demands a trade-off: Risk and return are positively correlated for them.
B is incorrect because constantly choosing the lowest risk means missing potential gains.
C is incorrect because risk-averse investors participate in the market but structure their portfolios to manage risk (e.g., diversification).