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2

You can think about it from different viewpoints. All answers are true. I'll just try to explain it from another angle. We are on the same page that everybody loves higher returns. The question is whether you also like higher risk or not. Loosely speaking, if you dislike risk, you are risk-averse. Now suppose in the equilibrium (basically what we observe in ...


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Risk aversion measures the degree to which someone prefers a sure thing to a gamble. If people are risk-averse that means they would, all else equal, prefer sure return to risky return, even if the expected return is the same. For example, a risk-averse person would rather invest into an asset that yields \$50 with certainty than in an asset that would have ...


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When more investors buy something, its return rate goes down (because its price goes up but the return does not change). If investors didn't care about risk, this curve would be flat. If one of the investments had a higher return, investors would buy it until it didn't. If one of them had a lower return, investors would stop buying it until it didn't. If ...


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