Finance
posted by Anonymous .
Consider the following two, completely separate, economies. Te expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent – one stock increasing in price has no effect on the prices of other stocks. Assuming you are riskaverse and you could choose one of the two economies in which to invest, which one would you choose? Explain.

A risk adverse investor would choose the economy in which stockreturns are independent because the risk can be diversified away in a large portfolio.
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