Question

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?  

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.

States		Probability		Asset M Return		Asset N Return		Asset O Return
Boom		30​%		11%		20​%		3%
Normal		46​%		9%		13​%		9%
Recession		24%		3​%		0%		11%

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 N could reduce the risk to 1.00%.

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

C. There is not enough information to answer this question.

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

Answer 1