Questions:

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

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

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

4. What is the standard deviation of asset M?

5. 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 ____\

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

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

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

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

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

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

12. 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?

a. There is not enough information

b. Yes, a portfolio of 50% of asset M and 50% of Asset N could reduce the risk to 1.00%

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

D. Yes, the portfolio of 50% of asset M and 50% of asset O could reduce the risk to 1.00%

Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: States Boom Normal Recession Asset N Return 22% Probability 32% 53% 15% Asset M Return 12% 9% Asset O Return 0% 9% 12% 14% 0% 2%