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

If investors' aversion to risk increases, the risk premium on a high-beta stock would increase more than that on a low-beta stock.

The beta of a stock measures its volatility relative to the overall market. A high-beta stock has higher volatility and, therefore, more risk than a low-beta stock. When investors become more risk-averse, they demand a higher return to hold these high-beta stocks. Therefore, the risk premium, the difference between the expected return on a stock and the risk-free rate, would increase more for a high-beta stock than for a low-beta stock.

So when investors are more worried about risks, they will want more money to invest in riskier stocks. And high-beta stocks are considered risky than low-beta stocks. So, investors will ask for more money to invest in high-beta stocks than low-beta stocks.

In conclusion, when investors' aversion to risk increases, the risk premium on a high-beta stock would increase more than that on a low-beta stock. This is because high-beta stocks are considered riskier than low-beta stocks, and investors will demand a higher return to hold these high-beta stocks when they are more risk-averse

Q2 To add on, it's also worth noting that this increased risk premium on high-beta stocks may lead to a decrease in demand for these stocks, potentially causing the prices to decrease. Can you discuss how this decrease in demand and price might impact the company's overall financial performance?

Answer rating: 100% (QA)

Answer The decrease in demand for highbeta stocks due to an increase in the risk premium can have several implications for the companys overall financ... View the full answer