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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.

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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.

Step-by-step explanation:

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