Final answer:
A risk-averse investor would opt for the Minimum Variance Portfolio, which aims to have the lowest variance or risk. This portfolio choice is best for those who prioritize stability over higher potential returns and is more suited for someone with a low risk tolerance.
Step-by-step explanation:
An investor who is very risk averse would likely select the Minimum Variance Portfolio from the opportunity set of risky assets. This portfolio is specifically designed to have the lowest possible volatility (or variance) for a given level of expected returns, which aligns with the goal of minimizing risk. The Minimum Variance Portfolio is often preferred by investors who want to limit their exposure to uncertainty and potential losses. In contrast to other options like the Capital Market Line Portfolio, Market Portfolio, or the Maximum Sharpe Ratio Portfolio, which might offer higher expected returns, this portfolio prioritizes stability and is less sensitive to market fluctuations.
The tradeoff between expected return and risk is fundamental in investment decisions. Risk-averse investors accept lower expected returns in exchange for lower risk, as seen in the preference for bank accounts or bonds over stocks, which, while they have the potential for higher returns, also carry greater risk. The portfolio an investor chooses reflects their risk tolerance and investment goals, and for the very risk-averse individual, the Minimum Variance Portfolio offers a balance they may find acceptable.