Question

Benefits 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		34​%		13​%		23​%		5​%
Normal		54​%		11​%		15​%		11%
Recession		12​%		5%		3%		13%

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 decreasing her risk by _____​%. ​(Round to two decimal​ places.)

Answer 1