Benefits of

diversification.

Sally Rogers has decided to invest her wealth equally across the following three assets:

What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset M alone?

Hint:

Find the standard deviations of asset M and of the portfolio equally invested in assets M, N, and O.

Question content area bottom

Part 1

What is the expected return of investing equally in all three assets M, N, and O?

(Round to two decimal places.)

(Click on the following icon

in order to copy its contents into a spreadsheet.)

States	Probability	Asset M Return	Asset N Return	Asset O Return
Boom		25%		13%		24%		5%
Normal		50%		11%		15%		11%
Recession		25%		5%		4%		13%