Diversification of International Financial Risk: Consider a world of two countries, Highland (H) and Lowland (L). Each country has an average output of 9 and desires to smooth consumption. All income takes the form of capital income and is fully consumed each period. Initially, there are two states of the world: Pestilence (P) and Flood (F). Each happens with 50% probability. Pestilence affects Highland and lowers the output there to 8; leaving Lowland unaffected with an output of 10. Flood affects Lowland and lowers the output there to 8, leaving Highland unaffected with an output of 10. Devise a table with two rows corresponding to each state (rows marked P and F). In three columns, show income to three portfolios: the portfolio of 100% H capital, the portfolio of 100% L capital, and the portfolio of 50% H + 50% L capital. Fill in the blank cells in the following table. Two more states of world appear: Armageddon (A) and Utopia (U). Each happens with 50% probability but is uncorrelated with the P-F state. Armageddon affects both countries equally and lowers income in each country by a further 4 units, whatever the P-F state. Utopia leaves each country unaffected. Devise a table with four rows corresponding to each state (rows marked PA, PU, FA, FU). In three columns, show income to three portfolios: the portfolio of 100% H capital, the portfolio of 100% L capital, and the portfolio of 50% H + 50% L capital. Compare your answers to (a) and (b) and consider the optimal portfolio choices. Does diversification from financial globalization eliminate consumption risk in each case? Explain