As investment risk rises, what do shareholders require?

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Multiple Choice

As investment risk rises, what do shareholders require?

Explanation:
The main idea is the risk–return trade-off: investors demand a higher expected return to compensate for greater risk. When investment risk rises, shareholders require an increase in the rate of return they expect from the investment to make taking on that extra risk worthwhile. Dividends or liquidity preferences aren’t the direct adjustment that resolves higher risk in this sense, and while lower risk would be nice, you can’t demand less risk when risk has already increased. So the best answer is that shareholders require increasing rates of return to compensate for the higher risk.

The main idea is the risk–return trade-off: investors demand a higher expected return to compensate for greater risk. When investment risk rises, shareholders require an increase in the rate of return they expect from the investment to make taking on that extra risk worthwhile. Dividends or liquidity preferences aren’t the direct adjustment that resolves higher risk in this sense, and while lower risk would be nice, you can’t demand less risk when risk has already increased. So the best answer is that shareholders require increasing rates of return to compensate for the higher risk.

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