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

Question

Quizplus · Accepted Answer

As risk aversion increases, investors become more cautious and demand a higher return on their investments. This means that their required rate of return will increase, as they will only be willing to invest in stocks with a higher potential return to compensate for the perceived increase in risk. This does not necessarily mean that a firm's beta will increase or decrease, as beta is a measure of a stock's volatility relative to the market and is not directly affected by investors' risk aversion.

As Risk Aversion Increases