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 Boom Normal Recession Probability 32% 48% 20% Asset M Return 10% 8% 2% Asset N Return 20% 12% 0% Asset O Return 2% 8% 10%