Question

The SML helps determine the level of risk aversion among investors. The higher the level of risk aversion, the the slope of the SML. Which kind of stock is most affected by changes in risk aversion? (In other words, which stocks see the biggest change in their required returns?)

Answer 1

Answer: High-beta stocks.

Step-by-step explanation:

Higher beta stocks are judged to be more volatile than lower beta stock. Essentially, they see the highest change in required returns as a result of risk aversion.

A beta that is greater than 1 shoes that the asset is more volatile than the market which has a beta of 1. If a stock has a beta of 3 for instance. That means it is 200% more volatile than the market.

This is why they are more affected by risk aversion.

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