Benefits of

diversification.

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

a.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.

b.Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair.

What is the expected return of a portfolio of 50% asset M and 50% asset O?

What is the expected return of investing equally in all three assets M, N, and Of 11.15% (Round to wo decimal places) Data table (Click on the following cont in order to copy its contents in a sprea) Amet M Retire 11% M -1% Patee Boom Normal Recession 34% 53% 13% CED Print Aint N Natur 21% 13% IN Done At O Matars 16 ON 11% a. What is the expected return of investing equally in all three assets M, N, and O? 11.15% (Round to two decimal places.) Data table. (Click on the following icon in order to copy its contents into a spreadsheet) Stutes Amet N Return AM Return 11% Boom 21% Normal 8% 13% Recession -1% 1% Probability 34% 63% 13% Print Done Asset O Return -1% 8% 11% X S a. What are her expected returns and the risk from her investment in the three assets? How do they compare with investing in asset Malone? Hint Find the standard deviations of asset M and of the portfolio equally invested in and 0. b. Could Sally reduce her total risk even more by using assets M and N only, assets M and O only, or assets N and O only? Use a 50/50 split between the asset pairs, and find the standard deviation of each asset pair. a. What is the expected return of investing equally in all three assets M, N, and 07 9.11% (Round to two decimal places) What is the expected retum of investing in asset Malone? 7.85% (Round to two decimal places) What is the standard deviation of the portfolio that invests equally in all three assets M, N, and 07 E- 213% (Round to two decimal places) What is the standard deviation of asset M 3.08% (Round to two decimal places) By investing in the portful that invests equally in all three assets M. N. and O rather than asset Malone, Sally can benefit by increasing her return by 1.28% and decrease her risk by 1.55% (Round b. What is the expected return of a portfolio of 50% asset M and 50% asset? 11.01% (found to two decimal places) What is the expected retum of a portfolio of 50% asset M and 50% asset O? 0.05% (Round to two decimal places) ecimal places) Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Probability 34% Asset M Return 11% 8% 53% 13% - 1% States Boom Normal Recession Print Asset N Return 21% 13% 1% Done Asset O Return 1% 8% 11% X