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.

States		Probability		Asset M Return		Asset N Return		Asset O Return
Boom		28%		12%		21%		0%
Normal		52%		9%		14%		9%
Recession		20%		0%		1%		12%

Benedits of diversitication Sally Rogers has decided to invest her wealth equally across the following three assets a. What ane her expected retums and the risk from her investment in the three assets? How do they compare with investing in asset M alone? Hnt Find the standard deviations of asset M and of the portfolo 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 anly or assets N and O enly? Use a 50/50 splt bebween the asset pairs, and find the standard deviation of each asset pakr States Beom Normal Recession A MFen Probability 20% Asset N Rebn Asset O Retrm 0% 21% 14% 12% 525 9 % 9% 20% 0% 12%