With higher variance in investments and a constant risk-free rate, the risk premium is likely to?

In the context of investments, the risk premium is the additional return that investors require for taking on additional risk compared to a risk-free asset. When the variance in investments increases, it indicates that there is greater uncertainty regarding future returns. Investors typically demand a higher risk premium to compensate for this increased uncertainty.

As the variance rises, the potential for both higher returns and greater losses becomes more pronounced, leading investors to seek greater compensation for the risk they are assuming. In a scenario where the risk-free rate remains constant, the heightened risk associated with the higher variance translates directly into an increased risk premium. Therefore, investors will require a larger return over the risk-free rate to engage in riskier investments.

This relationship highlights the fundamental principle of risk and return in finance: as risk increases, the expected return must also increase to attract investors, resulting in an increase in the risk premium.