Consider the following two, completely separate, economies. The expected return violatility 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 price 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.

Question

Consider the following two, completely separate, economies. The expected return violatility 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 price 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.

Ms. Sue · Answer

I'd invest in several stocks in the second economy. I'd be taking less risk because while some stock prices may fall, others will probably rise. The first economy is like putting all of your eggs in one basket.

Anonymous · Answer

Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10 years. What is the present value of this 20 year cash flow? Use an 11% discount rate.