What does risk aversion refer to? An investors willingness to buy investments with less certain, but higher, returns ?

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Originally Posted by scomerford

What does risk aversion refer to? An investors willingness to buy investments with less certain, but higher, returns ?

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The tendency of investors to avoid risky investments. So, if two investments offer the same expected yield but have different risk characteristics, investors will choose the one with the lowest variability in returns. If investors are risk averse, higher-risk investments must offer higher expected yields. Otherwise, they will not be competitive with the less risky investments.