Question

Which of the following statements regarding risk-averse investors is true?

A. They only accept risky investments that offer risk premiums over the risk-free rate.
B. They only care about the rate of return.
C. They are willing to accept lower returns and high risk.
D. They accept investments that are fair games.

Answer 1

A. They only accept risky investments that offer risk premiums over the risk-free rate.

Step-by-step explanation:

A risk-averse investor would only accept a risky investment if there is some sort of compensation for taking said risk (besides the possibility of earning a higher return).

The problem with the higher returns, is that they are a possiblity, not something that is bound to happen. Therefore, the risk-averse investor needs a safe risk premium that is paid to him whether the returns are attained or not.