Greater risk aversion results in lower required returns for each level of risk, whereas a reduction in risk aversion would cause the required return for each level of risk to increase as depicted by SML.

Question

Quizplus · Accepted Answer

Greater risk aversion results in higher required returns for each level of risk, as investors demand more compensation for taking on additional risk. Conversely, a reduction in risk aversion would cause the required return for each level of risk to decrease.

Greater Risk Aversion Results in Lower Required Returns for Each