Risk aversion implies that:
A)an investor will prefer a higher expected return than a lower expected return.
B)an investor will refuse to bear any risk at all.
C)an investor will tolerate extra risk if it is expected that the return will compensate them for bearing it.
D)an investor will be indifferent to the level of risk providing that the expected return is identical.

Question

Quizplus · Accepted Answer

Risk aversion means that an investor prefers less risk to more risk, but they will tolerate some extra risk if it is expected to result in a higher return. Therefore, the correct answer is C, which states that an investor will tolerate extra risk if it is expected that the return will compensate them for bearing it. Options A and D are incorrect as they imply that the investor is indifferent to risk, which is not in line with the definition of risk aversion. Option B is incorrect as it is an extreme choice implying that the investor would not tolerate any amount of risk which would be unrealistic.

Risk Aversion Implies That