Question

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

Answer 1

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.