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Consider the following two, completely separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first economy, all stocks move together - in good times
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29 votes
29 votes
Consider the following two, completely separate, economies. The 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 go up 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 risk-averse and you could choose one of the two economies in which to invest, which one would you choose

User Mbethke
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1 Answer

23 votes
23 votes

Answer:

As a risk averse investor I would choose the second option.

Step-by-step explanation:

As a risk averse investor I would choose the second option. The second option described case whereby In an

economy whereby stocks returns are independent. And with this, risk can be diversified away as far as a large portfolio is concerned.

User Aakash Uniyal
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