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.

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

%(Round to two decimal places.)

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

%(Round to two decimal places.)

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

%(Round to two decimal places.)

What is the standard deviation of asset M?

%(Round to two decimal places.)

By investing in the portfolio that invests equally in all three assets M, N, and O rather than asset M alone, Sally can benefit by increasing her return by % and decrease her risk by %.(Round to two decimal places.)

b.What is the expected return of a portfolio of 50% asset M and 50% asset N?

%(Round to two decimal places.)

What is the expected return of a portfolio of 50% asset M and 50% asset O?

%(Round to two decimal places.)

What is the expected return of a portfolio of 50% asset N and 50% asset O?

%(Round to two decimal places.)

What is the standard deviation of a portfolio of 50% asset M and 50% asset N?

%(Round to two decimal places.)

What is the standard deviation of a portfolio of 50% asset M and 50% asset O?

%(Round to two decimal places.)

What is the standard deviation of a portfolio of 50% asset N and 50% asset O?

%(Round to two decimal places.)

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?(Select the best response.)

A.Yes, a portfolio of 50% of asset M and 50% of asset O could reduce the risk to0.99%.

B.No, none of the portfolios using a 50-50 split reduce risk.

C.Yes, a portfolio of 50% of asset M and 50% of asset N could reduce the risk to 0.99%.

States	Probability	Asset M Return	Asset N Return	Asset 0 Return
Boom	32%	12%	22%	4%
Normal	45%	10%	14%	10%
Recession	23%	4%	2%	12%