Chartered Market Technician (CMT) Practice Exam

Risk aversion in finance refers to the tendency of investors to prefer lower risk investments even if that means potentially lower returns. This behavior stems from the desire to avoid losses and the anxiety associated with uncertainty.

The correct choice highlights that risk-averse investors are inclined towards higher returns that come with lower variance. This aligns with the core principle of risk aversion, where individuals seek to maximize their returns while minimizing risk exposure. By choosing investments that promise higher returns but with less variability, investors protect themselves from significant downside risk while still aiming for favorable outcomes.

In contrast, the other options reflect preferences that do not adhere to the fundamental nature of risk aversion. For example, a preference for higher returns with higher variance does not reflect risk aversion, as it suggests a tolerance for volatility. Similarly, lower returns with higher safety might appeal to a conservative investor but does not align with the goals of maximizing returns. Lastly, the choice for consistent returns regardless of risk might omit the investor's inclination towards a risk-reward balance, as it implies stability over potential growth. Thus, the emphasis on higher returns with less variance resonates clearly with the principles of risk aversion.