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?

B. How do they compare with investing in asset M alone?

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

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

States Probability Asset M Return Asset N Return Asset O Return Boom 25% 14% 24% 2% Normal 47% 11% 16% 11% Recession 28% 2% 4% 14%