Assume that there are two stock markets with one common factor F, where E(F) =...
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Accounting
Assume that there are two stock markets with one common factor F, where E(F) = 0 and F = 15%. There are many securities in each market.
The return on a security, i, in market 1 is:
R1i = 0.15 + 1.5F + e1i
The return on a security, j, in market 2 is:
R2j = 0.12 + 1.1F + e2j
Where E(e1i) = E(e2j) = 0, e1i = e2j = 20%.
If you have to choose one of the two markets, and if the correlations of unsystematic risk between two assets are 0.85 for the market 1 and 0 for the market 2, which market do you invest? Why?
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