Which statement best describes risk-averse behavior?

Which statement best describes risk-averse behavior?

• A. They avoid all risk
• B. They always seek risk with higher returns
• C. When faced with the same payoff, they choose the least risk
• D. They ignore diversification

Answer: (C)

Risk-averse behavior means preferring options with the least uncertainty when the expected payoff is the same. If two options offer the same payoff, a risk-averse person will choose the one with the smaller risk (lower variability or chance of a worse outcome). They don’t avoid all risk, they just avoid unnecessary risk when the outcome is unchanged. They don’t always seek higher risk for higher returns—that describes someone who is risk-seeking. They also don’t ignore diversification; diversification is a common way to reduce risk, which risk-averse individuals typically favor. Therefore, choosing the option with the least risk when payoffs are identical best describes risk-averse behavior.

Risk-averse behavior means preferring options with the least uncertainty when the expected payoff is the same. If two options offer the same payoff, a risk-averse person will choose the one with the smaller risk (lower variability or chance of a worse outcome). They don’t avoid all risk, they just avoid unnecessary risk when the outcome is unchanged. They don’t always seek higher risk for higher returns—that describes someone who is risk-seeking. They also don’t ignore diversification; diversification is a common way to reduce risk, which risk-averse individuals typically favor. Therefore, choosing the option with the least risk when payoffs are identical best describes risk-averse behavior.