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

States Probability Asset M Return Asset N Return Asset O Return Boom 25% 11% 22% -1% Normal 48% 8% 13% 8% Recession 27% -1% 2% 11%

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.