From the following equation for expected returns, explain what may cause stock prices to decrease in economic recessions: E(r) – risk-free rate = A*Var(r) A is the risk aversion for the average investor, and Var(r) is the variance of the market portfolio. Assume that investor risk aversion is constant

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A: W1 =  [E(σ1)2 − r1.2 E(σ1) E(σ2)]/[E(σ1)2 + E(σ2)2 − 2 r1.2 E(σ1) E(σ2)] when, r1.2 = -1 W1 = E(σ1)2…

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