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Risk Averse

 

Risk averse is a characteristic of an investor who is avoiding risk. The more investor is avoiding the risk the more is he risk averse. Almost all the investors (as people are too) are more or less risk averse and only the level of risk aversion is different.

 

Risk averse is an opposite characteristic to risk tolerance. That means investor cannot be strongly risk averse and have high risk tolerance. Either he is risk averse either risk tolerable and most of investors are in between those to two poles. 

 

Risk aversion is normal reaction of an investor who is afraid of losses, however without risk the return of investments may be very low or even we could say that in the reality there are no totally riskless investments. Everything in this world contains some level of risk. We even can’t be guaranteed how long our planet will survive so how could be anyone sure about any investment? The reality is that investor who is risk averse still have to take some level of risk, the question is only how much of risk comparing to average risk averseness.

 

Risk aversion is an important driver to make investment markets effective and keep risk-return balance. Risk free interest rate is a description of what return can be from riskless investment theoretically, but in practice even risk free rate contains some insignificant level of risk.






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