Assume that there are two stock markets with one common factor F, where E(F) = 0 and _F = 15%. There are many securities in each market.

The return on a security, i, in market 1 is:

R_1i = 0.15 + 1.5F + e_1i

The return on a security, j, in market 2 is:

R_2j = 0.12 + 1.1F + e_2j

Where E(e_1i) = E(e_2j) = 0, _e1i = _e2j = 20%.

If you have to choose one of the two markets, and if the correlations of unsystematic risk between two assets are 0.85 for the market 1 and 0 for the market 2, which market do you invest? Why?