Assume that there are two stock markets with one common factor F, where E(F) = 0 and

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Assume that there are two stock markets with one common factor F, where E(F) = 0 and σ_F = 15%. There are many securities in each market.

The return on a security, i, in market 1 is:

R_1i = 0.15 + 1.5F + e_1i

The return on a security, j, in market 2 is:

R_2j = 0.12 + 1.1F + e_2j

Where E(e_1i) = E(e_2j) = 0, σ_e1i = σ_e2j = 20%.

If you have to choose one of the two markets, and if the correlations of unsystematic risk between two assets are 0 for the market 1 and 0.85 for the market 2, which market do you invest? Why?

Related Book For answer-question

Economics

ISBN: 978-0273721307

7th edition

Authors: John Sloman, Alison Wride

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Posted Date: Jul 15, 2021 03:26 AM

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Assume that there are two stock markets with one common factor F, where E(F) = 0 and

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Before i can answer the question lets assume the two markets consist of 3 types of stocks 1 Constant ... View the full answer

Economics

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