What is Risk Aversion & Sharpe Ratio|Computed & explained. Essentials of Investments Course CFA Exam
Channel: Farhat Lectures. The # 1 CPA & Accounting Courses
Date: 2020-08-02

In this video, I will discuss risk aversion.   Risk aversion is the behavior of humans (especially consumers and investors), who, when exposed to uncertainty, attempt to lower that uncertainty.  A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. 

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Prerequisite:
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The degree to which investors are willing to commit funds to stocks depends in part on their risk aversion. It seems obvious that investors are risk averse in the sense that, without a positive risk premium, they would not be willing to invest in stocks. In theory then, there must always be a positive risk premium on risky assets in order to induce risk-averse investors to hold the existing supply of these assets.


Risk aversion is reluctance to accept risk.

Risk aversion implies that investors will demand a higher reward (as measured by their portfolio risk premium) to accept higher portfolio volatility. A statistic commonly used to rank portfolios in terms of this risk-return trade-off is the Sharpe ratio