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Change in risk premium with change in risk aversion

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If investors' aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain.

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Solution Summary

This problem answers a conceptual question on relationship between the risk aversion of investors and the risk premium they are willing to charge for taking the risk given different levels of beta. By doing such problems the student will be able to strengthen the conceptual foundation.

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As the risk aversion increase, the demand for risk premium will increased. Thus, risk premium on a high-beta stock increase ...

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