These surprises are normally distributed; their mean is zero. The standard deviation of 1i and 2j for any two stocks, i and j, is 20 percent.

a. If the correlation between the surprises in the returns of any two stocks in the first market is zero, and if the correlation between the surprises in the returns of any two stocks in the second market is zero, in which market would a risk-averse person prefer to invest? (Note:

The correlation between 1i and 1j for any i and j is zero, and the correlation between 2i and 2j for any i and j is zero.)

b. If the correlation between 1i and 1j in the first market is 0.9 and the correlation between

2i and 2j in the second market is zero, in which market would a risk-averse person prefer to invest?

c. If the correlation between 1i and 1j in the first market is zero and the correlation between

2i and 2j in the second market is 0.5, in which market would a risk-averse person prefer to invest?

d. In general, what is the relationship between the correlations of the disturbances in the two markets that would make a risk-averse person equally willing to invest in either of the two markets? LO.1