Given what you know about risk preferences and what propels individuals to take risk evaluate, using what you know about the business model of each firm and from the perspective of the shareholder of the firm:
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Answer:
How Risk-Averse Investors Work
The term risk-neutral is used to describe the attitude of an individual who may be evaluating investment alternatives. If the individual focuses solely on potential gains regardless of the risk, that person is said to be risk-neutral. Such behavior, to evaluate reward without thought to risk, may seem to be inherently risky.
A risk-averse investor would not consider the choice to risk $1,000 loss with the possibility of making $50 gain to be the same risk as a choice to risk only $100 to make the same $50 gain. However, someone who is risk-neutral would. Given two investment opportunities, the risk-neutral investor only looks at the potential gains of each investment and ignores the potential downside risk.
A risk-averse investor, on the other hand, dislikes risk and, thus, stays away from high-risk stocks or investments and is prepared to forego higher rates of return. Investors who are looking for "safer" investments typically invest in savings accounts, bonds, dividend growth stocks and certificates of deposit (CDs).
A risk-averse individual has a low risk tolerance or a high risk aversion. These conservative investors are willing to accept little to no volatility in their investment portfolios. Often, retirees who have spent decades building a nest egg are unwilling to allow any type of risk to their principal. A conservative investor targets vehicles that are guaranteed and highly liquid.
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