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You are a risk-averse investor who is considering investing in one of two economies. The expected return and volatility of all shares in both economies
You are a risk-averse investor who is considering investing in one of two economies. The expected return and volatility of all shares in both economies is the same. In the first economy, all shares move togetherin good times all prices rise together, and in bad times they all fall together. In the second economy, share returns are independent-one share increasing in price has no effect on the prices of other shares. Which economy would you choose to invest in? Explain. A. A risk averse investor is indifferent in both cases because he or she faces unpredictable risk. B. A risk averse investor would prefer the economy in which share returns are independent because by combining the shares into a portfolio he or she can get a higher expected return than in the economy in which all shares move together. C. A risk averse investor would choose the economy in which shares move together because the uncertainty is much more predictable, and you have to predict only one thing. OD. A risk averse investor would choose the economy in which share returns are independent because risk can be diversified away in a large portfolio
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