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'Risk aversion does not mean that people and institutions are not willing to take risks. However, they need to be compensated for taking risk.' Explain and discuss.
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'Risk aversion does not mean that people and institutions are not willing to take risks. However, they need to be compensated for taking risk.' Explain and discuss Risk aversion can be defined as the avoidance of risk. Risk averters are those who do not wish to take risks, when facing choices of comparable returns they tend to chose the less risky alternative. In any financial system varying degrees of risk exist so there is no way to successfully avoid it altogether, but the principle that transactors seek to minimise risk forms the basis of risk aversion. It is important to understand the economic characteristics of the risk averter before assessing their actions within the financial market. Individuals and institutions have different appetites for risks. Risk avertors are at one end of the scale avoiding risk, risk lovers at the other and risk neutrals sit in the middle1. Financial intermediaries channel funds from...
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