Benefits of

diversification.

Sally Rogers has decided to invest her wealth equally across the following three assets:

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. 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.

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

10.5810.58%

(Round to two decimal places.)

What is the expected return of investing in asset M alone?

8.658.65%

(Round to two decimal places.)

What is the standard deviation of the portfolio that invests equally in all three assets M, N, and O?

i - X Data Table 7 all three ass (Click on the following icon in order to copy its contents into a spreadsheet.) States Boom Normal Recession Probability 27% 49% 24% Asset M Return 13% 10% 1% Asset N Return 24% 15% 4% Asset O Return 1% 10% 13% Print Done