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Definition of 'Risk-Averse'

Risk-averse is a term used to describe an investor who is more concerned with avoiding losses than with maximizing gains. This type of investor is typically more conservative in their investment choices and may be more likely to invest in low-risk assets, such as bonds or cash.

There are a number of reasons why someone might be risk-averse. Some people may have a low tolerance for risk, while others may have a limited financial means and cannot afford to take on too much risk. Additionally, some people may be risk-averse due to their personal circumstances, such as having a family to support or being retired.

There are a number of ways to measure risk-aversion. One common method is to use the concept of utility. Utility is a measure of the satisfaction that an individual gets from consuming a particular good or service. In the context of investing, utility can be used to measure the satisfaction that an investor gets from receiving a particular return on their investment.

Risk-averse investors typically have a lower utility for returns that are further away from the mean. This means that they are more likely to choose an investment with a lower expected return but a lower risk of loss, than an investment with a higher expected return but a higher risk of loss.

Risk-aversion is an important concept in finance because it can help investors to make more informed investment decisions. By understanding their own risk-aversion, investors can choose investments that are appropriate for their individual needs and circumstances.

In addition to the above, there are a number of other factors that can influence an investor's risk-aversion. These factors include:

* Age: Younger investors tend to be more risk-tolerant than older investors, as they have a longer time horizon to recover from any losses.
* Income: Investors with higher incomes tend to be more risk-tolerant than those with lower incomes, as they can afford to take on more risk.
* Education: Investors with more education tend to be more risk-tolerant than those with less education, as they are more likely to understand the risks and rewards of investing.
* Personality: Some people are simply more risk-tolerant than others. This is often due to personality traits such as optimism and a willingness to take risks.

It is important to note that risk-aversion is not always a bad thing. In fact, it can be a very helpful trait for investors who are looking to protect their capital. However, it is important for investors to be aware of their own risk-aversion and to choose investments that are appropriate for their individual needs and circumstances.

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