QUESTION: The widely shared expectations of hard times ahead tend to cause investors to become less...

QUESTION: The widely shared expectations of hard times ahead tend to cause investors to become less risk-averse.

True or False with an explanation

Postings must be no less than 200 words

Solutions

Expert Solution

The answer to the above question is false.

Risk-averse is when an investor doesn’t like taking risks. For example, if he was faced with two investments that could bring similar expected return but different risk ration, he would definitely choose the one with the lower risk. A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. In other words, among various investments giving the same return with different level of risks, this investor always prefers the alternative with least interest. Risk-averse investors will lose out on high rates of return because they are always avoiding risk. An investor who is risk-averse would probably invest his money only on businesses that have a guaranteed return rather than in stocks that go up and down all the time. Investors who are risk-averse are more apt to choose the investment that presents a lower degree of risk if given two investment options with similar expected returns. Capital preservation and income generation are common investment objectives for risk-averse investors, which leaves some high-risk investments out of the picture. However, there are a number of lower-risk investments suitable for risk-averse individuals, including traditional bank accounts, government securities, corporate and municipal bonds, and preferred stock.

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