Answer to Question #219865 in Macroeconomics for Qaiser

Question

Q1. “No one who is risk-averse will ever buy a security that has a lower expected return, more
risk, and less liquidity than another security.” Is this statement true, false, or uncertain? Explain
your answer.

Answer 1

Lower expected returns implies that an investor itself expects that the respective security will not be able to provide good returns. Being a risk-averse person, an investor will definitely want to invest in the security which provides good returns even at a moderate degree of risk. 

A risk-averse person avoids a greater degree of risk because of his/her tendency to not taking risks. A risk-averse investor might satisfy with low returns but never desire for bearing a great amount of risks.

Be a risk-taking investor or a risk-averse investor, the investor tries to have a higher degree of liquidity with respect to investments. High liquidity facilitates an investor for any kind of contingency or for grabbing any other more profitable opportunity. Therefore, a smart investor always chooses moderate to high liquidity investment.

Thus, the statement stands true because the characteristics like lower expected returns, more risk, and less liquidity make the security less desirable with respect to investment purposes from any other security even for a risk-averse person.