The Expected Return and Volatility

In: Business and Management

Submitted By naronfao107
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10-20. 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 together—in good times all prices rise together and in bad times they all fall together. In the second economy, stock returns are independent—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.

Averse, reluctant, disinclined, loath, indisposed, unenthusiastic, (A) inclined,

(อะเวิร์ส') adj. คัดค้าน,ไม่ชอบ,รังเกียจ,ไม่ยินยอม,ไม่สมัครใจ,หันไปด้านตรงกันข้ามกับต้น , S. opposed, hostile
[adj.] ซึ่งไม่ชอบ ความหมายอื่น : ซึ่งรังเกียจ, ซึ่งคัดค้าน
คำตรงกันข้าม : agreeable คำความหมายเดียวกัน : unfavorable
[adj.] ไม่ถูกใจ,ไม่ชอบใจ,เกลียด,รังเกียจ,ไม่สมัครใจ

Investopedia explains Risk Averse
A risk-averse investor dislikes risk, and therefore will stay away from adding high-risk stocks or investments to their portfolio and in turn will often lose out on higher rates of return. Investors looking for "safer" investments will generally stick to index funds and government bonds, which generally have lower returns.

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

The second economy. To be risk averse, you have to reduce your investment sizes when the risks are correlated so a substantial proportion of your portfolio would have to remain risk free in the first economy whereas the lack of correlation in the second economy means that you can safely proportion more of your portfolio to be at risk.

Answer:

I would prefer the second economy. If we look at the first economy we can find that the stock in the economy move in…...

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