Construct a spreadsheet to replicate the analysis of Table 12.5. That is, assume $10,000 is invested in a single asset which returns 7 percent annually for 25 years and $2,000 is placed in 5 different investments, earning returns of –100%, 0%, 5%, 10%, 12%, respectively, over the 25 year time frame. For each of the questions below, begin with the original scenario presented in Table 12.5.

a. Experiment with the return on the fifth asset. How low can the return go and still have the diversified portfolio earn a higher return than the single-asset portfolio
b. What happens to the value of the diversified portfolio if the first two investments are both a total loss?

c. Suppose the single asset portfolio earns a return of 8 percent annually. How does the return of the single asset portfolio compare to that of the 5-asset portfolio? How does it compare if the single asset portfolio earns a 6 percent annual return?

d. Assume that Asset 1 of the diversified portfolio remains a total loss (-100% return) and asset two earns no return. Make a table showing how sensitive the portfolio returns are to a 1 percentage point change in the return of each of the other three assets. That is, how is the diversified portfolio’s value affected if the return on asset 3 is 4 percent and 6 percent? If the return on asset 4 is 9 percent or 11 percent? If the return on asset 5 is 11 percent? 13 percent? How does the total portfolio value change if each of the three asset’s returns are 1 percentage point lower than in Table 12.5? If they are one percentage point higher?

e. Using the sensitivity analysis of parts c and d, explain how the two portfolios differ in their sensitivity to different returns on their assets. What are the implications of this for choosing between a single asset portfolio and a diversified portfolio?