1. with the following two, completely separate, economies. The expected return and volatility of all stocks in both economies remains the same. In the first economy, all stocks move togetherin good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independentone stock increasing in price has no effect on the prices of other stocks. Assuming you are risk-averse and you could choose one of the two economies in which to invest, which one would you choose? Explain.
2. Explain why the risk premium of a stock does not depend on its diversifiable risk.