Gap Inc.

Assignment 3 FIN 534 Rafael Diaz Strayer University 08/06/2010 PROBLEM 20 Consider the spare-time activity two, completely separate, economies. The expected return and volatility of all commonplaces in both economies is the same. In the first economy, all storehouses move together-in right(a) times all prices rise together and in destructive times they all fall together. In the second economy, stock returns are independent- adept stock increasing in price has no effect on the prices of different stocks. Assuming you are risk-averse and you could distinguish one of the two economies in which to invest, which one would you choose? Explain. SOLUTION I would prefer to have the second economy. In this way, I crapper invest in different types of stocks and not have to nettle that they will all act the same. If my stocks are independent of all(prenominal) former(a) no matter the returns, then when one stock is not discharge well, another stock can be doing well. Therefore, they offset each other and I dont lose all my investiture specie. For example, if you take the airline industry.

When mickle are travel and times are good, then investiture in these companies are good but if all your investment is in this type of industry then when things are going good, you are happy and when things are going unfavourable and wad arent traveling, then your stocks are going to be bad and you wont be happy. Since all of your money is tie to these investments, then you have to hope that people are traveling and that this industry is busy all year around. On the other side, if you have stocks independent of each other, then if one come with or stock is going bad, you can put to a greater extent money on another stock that is doing well since your money is not tied up in just one type of industry. Taking again a look at a similar industry, another good example would be the showing movie industry. If you have a movie flying field company raise its prices, then almost surely other theater companies will follow. Hardly perpetually are prices ever lowered to... If you want to get a full essay, drift it on our website: Ordercustompaper.com

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