Consider the following two, completely separate economies. The expected return and volatility of all stocks in both economies are 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.
Which economy would you choose to invest in?
Explain your rationale for your choice.
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