If an investor's aversion to risk increased, would the risk premium on a high beta stock increase by more or less than that of a

Question

Sergio [31]

3 years ago

10

If an investor's aversion to risk increased, would the risk premium on a high beta stock increase by more or less than that of a

low-beta stock? Explain.

Business

1 answer:

8_murik_8 [283] · Answer 1 · 2022-06-04T21:57:51+03:00

Answer:

risk premium increases by more of the low - beta stock

A risk averse investor is an investor that avoids risk. if risk aversion increases, it means that the investor is more wary of risky investment.

Beta measures the volatility of a portfolio. the higher the volatility, the more risky the portfolio is.

risk premium measures the rate of return in excess of the risk free rate.

According to CAPM :

risk free rate + (beta x stock risk premium)

Beta is a multiplier of stock risk premium, so the higher the beta, the more there would be an increase in the stock risk premium

If a risk averse investor invests in a high beta stock, he would want extra or higher compensation for holding such a volatile stock. this extra compensation would be in the form of a higher risk premium.

Explanation: