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.

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Part 1

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

Data table (Click on the following icon in order to copy its contents into a spreadsheet.) Data table (Click on the following icon in order to copy its contents into a spreadsheet.)