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    Diversifying a Stock Portfolio

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    Consider the following two, completely separate, economies. The expected 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 risk-averse and you could chose one of the two economies in which to invest, which one would you choose.

    Only a short response is needed.

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    Solution Preview

    If you are a risk-averse investor, you will chose to invest in the second economy.

    In the first economy there exists a ...

    Solution Summary

    This solution briefly describes which economy the investor will choose in 207 words.