What is the relationship between an investor's level of risk aversion and the required risk premium?

I really hate to answer a question by asking a question so...
I believe there is an inverse relationship between the investors level of risk aversion and the associated risk premium.

That being said...

What kind of risk are you talking about there are zillion kinds of risk.

The most obvious is Market Risk ... Market goes down you lose money.

If you keep your money in your mattress you suffer inflation risk . If there is inflation you lose money every day cause it is worth less.

There is Management risk in Mutual funds and individual companies.

Tracking risk ..... etc. To keep your money you have to take some risk .

The Diehards have had many exellent conversations on risk.

Good Luck. Gerry

The relationship is direct.

The greater your level of risk aversion, the greater risk premium you will demand in order to compensate you for taking on risk.

The risk premium is essentially the cost of risk. Willingness to take risk is inversely proportional to that cost. So when investors are risk averse a larger risk premium is required to draw investors.

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