5. (a) 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 the other stocks. Which economy would you choose to invest in? Explain. [6 points) (b) Is it in shareholders' interests for companies to diversify their business lines in order to reduce the volatility of their earnings? Explain. [6 points) (e) What effect does a high fixed cost base have upon cost of capital? Explain. (6 points] (d) Does the value of a firm necessarily increase if the earnings growth of the firm increases? Explain. [6 points)