What is risk aversion, Financial Management

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What is risk aversion? If common stockholders are risk averse, how do you explain the fact that they often invest in very risky companies?

Risk aversion is the tendency to evade further risk. Risk-averse people will evade risk if they can, except they receive additional compensation for assuming that risk.  In finance, the additional compensation is a higher expected rate of return.

People aren't all are equally risk averse. For illustration, a few people are willing to buy risky stocks, while others aren't.  The ones that carry out, though, almost for all time demand an appropriately high expected rate of return for taking on the additional risk.

 

 


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