As risk aversion increases ________.
A) a firm's beta will remain neutral
B) investors' required rate of return will increase
C) a firm's beta will decrease
D) investors' required rate of return will remain unchanged

Question

Quizplus · Accepted Answer

As risk aversion increases, investors become less likely to tolerate risk and demand a higher return on their investment. This translates to an increase in the required rate of return for investors. Therefore, option B is the correct answer. Option A and C are not correct because the firm's beta, which measures the company's systematic risk, is not affected by investors' risk aversion. Option D is also incorrect because the required rate of return is influenced by risk aversion.

As Risk Aversion Increases ________