Returns are independent because risk can be diversified

Assignment Help Financial Management

Reference no: EM131359116

Consider the following? two, completely? separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first? economy, all stocks move togetherlong dash in good times all prices go up together and in bad times they all fall together. In the second? economy, stock returns are independentlong dash one 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. ?(Select the best choice? below.)

A. A? risk-averse investor would choose the economy in which stock returns are independent because risk can be diversified away in a large portfolio.

B. A? risk-averse investor is indifferent in both cases because he or she faces unpredictable risk.

C. A? risk-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 higher expected return than in the economy in which all stocks move together.

D. A? risk-averse investor would choose the economy in which stocks move together because the uncertainty is much more? predictable, and you have to predict only one thing.

Reference no: EM131359116

Questions Cloud

Why a business should be involved in political discussions : BUS475- Discuss the main reasons why a business should or should not be involved in political discussions or take a political stand. Demonstrate your understanding of the material.

Calculate the amount financed and amount of equity : calculate Amount financed (round to nearest dollar). Amount of equity (round to nearest dollar). Net Income Return on Investment (round to nearest 10th of a percen)

Examine main reasons why people are attracted to urban areas : SOC300- Examine the main reasons why people are attracted to urban areas in the developing world, and select the key issues that make this rural to urban migration such a difficult problem for governments to deal with.

Profitability and asset management ratios : Profitability and Asset Management Ratios You are thinking of investing in Tikki's Torches, Inc. You have only the following information on the firm at year-end 2008: net income = $690,000, total debt = $13.9 million, debt ratio = 44%. What is Tikki'..

Returns are independent because risk can be diversified : Consider the following? two, completely? separate, economies. The expected return and volatility of all stocks in both economies is the same. In the first? economy, all stocks move togetherlong dash in good times all prices go up together and in bad ..

What kind of contract has been used for this project : What kind of contract has been used for this project? Using the knowledge gained through "Procurement and Contracts Management Unit" explain in detail why was this contract unsuited for the project

Consider two local banks : Consider two local banks. Bank A has 100 loans? outstanding, each for $ 1.0 ?million, that it expects will be repaid today. Each loan has a 5 % probability of? default, in which case the bank is not repaid anything. The expected payoffs are the? same..

Traditionally pays an annual dividend : Capello's Deli traditionally pays an annual dividend of $1.67 per share. The firm is projecting dividends of $1.83 and $2.14 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.53 a share. What is t..

What is the value of this stock today if the required return : Gorgon Stoneworks Co. does not expect to pay any dividends for the next three years. Four years from now, the firm hopes to pay $.61 a share and double that amount each year for the following three years. After that, the dividend is expected to incre..

User Account

All Pages