Question

Risk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event will occur, and there is a trade-off between risk and return. The higher an investment’s risk, the

Answer 1

The higher an investment’s risk, the HIGHER THE RETURNS AN INVESTOR WILL REQUIRE.

Step-by-step explanation:

By saying that investors are risk averse, it means that given a similar level of returns, an investor will choose the investment with the lowest risk. That is why investors generally prefer and are willing to pay more for less risky investments, which results in lower returns (higher price ⇒ lower returns).

So high risk investments will always have a lower price than low risk investments, since the returns demanded by investors are proportional to the risk of the investment.