Suppose that there are two mutual funds available. Fund 1 has an expected return of 7% and the standard deviation (or volatility) of returns is 12%. Fund 2 has an expected return of 5% and the standard deviation (or volatility) of returns is 7%. In addition, there is a (risk-free) money-market fund with an expected return of 3%.

Suppose you are an investment manager with two clients, Lucy and Richard, who have different risk preferences. Lucy is more risk tolerant and would prefer to hold a portfolio with a return volatility of 15%. Richard, on the other hand, is more risk-averse and would prefer to hold a portfolio with a return volatility of 8%. Suppose that you cannot invest in both of the mutual funds in a single client's portfolio (i.e., Fund 1 and Fund 2). However, you are free to choose either fund for each client (Lucy and Richard) and can mix it with the money-market fund in any proportion that you choose. Which of the two funds would you choose for Richard and why?