You are arisk-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 thefirsteconomy, all stocks move togetherlong dashingood times all prices risetogether, and in bad times they all fall together. In the secondeconomy, stock returns areindependentlong dashonestock increasing in price has no effect on the prices of other stocks. Which economy would you choose to investin? Explain.

A) Arisk averse investor would prefer the economy in which stock returns are independent because by combining the stocks into a portfolio he or she can get a higherexpected return than in the economy in which all stocks move together.

B)A risk averse investor would choose the economy in which stocks move together because the uncertainty is much morepredictable, and you have to predict only one thing.

C) Arisk averse investor would choose the economy in which stock returns are independent because risk can be diversified away in a large portfolio.

D) Arisk averse investor is indifferent in both cases because he or she faces unpredictable risk.