Final answer:
A risk-averse investor would most likely reject a portfolio with high volatility due to the high level of associated risk. Historical events such as financial crises showcase the risks of high-volatility investments, reinforcing cautious investors' preference for safer asset classes that offer more security, albeit with potentially lower returns.
Step-by-step explanation:
A risk-averse investor is typically concerned with minimizing exposure to risk, even if it might come at the cost of potential higher returns. Among the options provided, a portfolio with high volatility would most likely be immediately rejected by such an investor because high volatility indicates a high level of risk. Throughout history, episodes like the 2008 financial crisis underscore how high-risk investments can lead to significant losses, reinforcing the preference of risk-averse investors for stability over potential high returns.
The risk and expected return are inversely proportional for risk-averse investors. Safer investments like bank accounts offer lower returns but come with minimal risk, whereas riskier investments like stocks offer a potential for higher returns to compensate for their increased risk. A risk-averse investor will prioritize the safety of capital, often selecting investments with a lower probability of loss, such as those that are diversified and have lower volatility.