Mr. Jim Rosario, a financial adviser, is planning to make an investment portfolio for his client. He is currently looking at three possible portfolio combination. Listed below are the three options together with the expected return and standard deviation.

 

Investment                                           Expected return           Standard deviation

50% bonds and 50% stocks                              20%                              7.0%

80% bonds and 20% stocks                              19                                 6.0

20% bonds and 80% stocks                              22                                 9.5

 

1. Upon evaluating the client, Mr. Rosario discovered that his client is considered risk averse, which investment portfolio should he recommend? Why should Mr. Rosario recommend such portfolio?
2. 
   
3. What is the purpose of an expected return and standard deviation in making an investment decision?