Diversification in Stock Portfolios

Problem Introduction ,There are several areas can be considered when understanding the risk of an investment. In this exercise, as a risk-averse investor, each of the expected rate of return and volatility of the stock for both of the economies is the same. However, for economy number one, all the stocks move together. For economy number two, the stock returns are independent of each other. Which is the best investment?
Economy One In the first economy, all stock move together, up and down as the market does. Our textbook refers to this type of economy as systematic risk. This can also be called “undiversifiable, or market risk.” (Berk, 303) This type of economy is affected by the volatility of the marketplace, and any world and nation events that can occur, to drive the price of stocks up and down. In good economic times, in which housing is booming, a good job market, and retail has received good sales for this investment period, the outcome of your investment in this economy would be considerably well. In which all stock performed to their capability, and a high rate of return is expected. This is due there were no affects on the performance of the stock from the outside to drive the price down. In the second economy option for the investor to invest in, this economy offers the same rates of return as the first economy. The examples of 30% and -15% expected rates of returns are the same for each stock. This type of economy is often referred to as “independent, unsystematic, firm-specific, idiosyncratic, diversifiable risk.” (Berk, 303). Economy one was affected by outside market changes which fluctuates the stock prices for all the stocks that particular market. In economy number two, the types of changes that are driven by the stock in this economy, are each