enefits of

diversification.

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

States		Probability		Asset M Return		Asset N Return		Asset O Return
Boom		30%		12%		19%		2%
Normal		50%		8%		11%		8%
Recession		20%		2%		2%		12%

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

Your answer is correct. You answered 8.6.8.6%

(Round to two decimal places.)

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

Your answer is correct. You answered 8.00.8.00%

(Round to two decimal places.)

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

Your answer is correct. You answered 2.46.2.46%

(Round to two decimal places.)

What is the standard deviation of asset M?

Your answer is correct. You answered 3.46.3.46%

(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 decreasing her risk by

%. (Round to two decimal places.)