If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be goes up.
The risk premium also rises as risk aversion does, making the slope of the security market line (SML) steeper. The needed rate of return increases as security market lines get more steep.
In other words, aversion to risk results in a risk premium, which is an anticipated additional return needed by investors to make up for the risk associated with stock ownership because in risk aversion, an investor who favors capital preservation over the possibility of a higher-than-average return is acting rationally.
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