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    Impact of risk aversion on asset prices

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    Suppose the market risk premium is currently 6%. If investors were to become more risk-averse, the market risk premium might increase to 8%. If investors become more risk-averse, what effect would you expect this to have on the prices of financial assets?

    Prices would increase?
    Prices would be unaffected?
    Prices would decrease?

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    When investors are more risk averse, market risk premium will increase and hence the ...

    Solution Summary

    This post answer a simple question on how the degree of risk aversion would impact the prices of financial assets.