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	32%	11%	20%	3%
Normal	51%	9%	13%	9%
Recession	17%	3%	0%	11%