If you are a risk-averse investor, would you invest in an economy with correlated stock returns or independent stock returns?
Not what you're looking for?
You are a risk-averse investor who is considering investing in one of two 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 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.
Which economy would you choose to invest in?
Purchase this Solution
Solution Summary
This post addresses which economy choose to invest in, illustrated with examples in 725 words.
Solution Preview
Thanks!
========================
You are a risk-averse investor who is considering investing in one of two 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 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.
Which economy would you choose to invest in? Explain and illustrate with examples.
In the investment domain, risk is the uncertainty about future returns. The greater this uncertainty, the more risky an investment is perceived to be. It refers to the likelihood of receiving a return on an investment that is different from the expected rate of return. In includes both upside risk i.e. returns that are higher than expected and downside risk i.e., returns that are lower than expected.
A risk-averse investor when given a choice between two assets with equal rates of return but with different ...
Purchase this Solution
Free BrainMass Quizzes
Business Processes
This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.
Learning Lean
This quiz will help you understand the basic concepts of Lean.
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Motivation
This tests some key elements of major motivation theories.