Consider the following two, completely separate, economies. The expected return and volatility of all stocks...
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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 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? Explain. (Select the best choice below.) A. A risk-averse investor is indifferent in both cases because he or she faces unpredictable risk. B. A risk-averse investor would choose the economy in which stock returns are independent because risk can be diversified away in a large portfolio. C. A risk-averse investor would choose the economy in which stocks move together because the uncertainty is much more predictable, and you have to predict only one thing. D. A risk-averse investor would prefer the economy in which stock returns are independent because by combining the stocks into a portfolio he or she can get a higher expected return than in the economy in which all stocks move together
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