How Does the Risk of Slashing Affect the Staking Yield Demanded by Validators?

The risk of slashing is a non-zero operational risk that validators face. To compensate for this risk, validators demand a higher staking yield (return on their staked capital).

This is a risk premium, similar to how investors demand a higher return for riskier financial assets. A higher risk of slashing translates to a higher required yield to make the staking operation economically attractive.