Benefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets.?? a.??What are...

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Finance

Benefits of
diversification.
Sally Rogers has decided to invest her wealth equally across thefollowing three assets.??
a.??What are her expected returns and the risk from herinvestment in the three? assets? How do they compare with investingin asset M? alone???
Hint?:
Find the standard deviations of asset M and of the portfolioequally invested in assets? M, N, and O.
b.??Could Sally reduce her total risk even more by using assetsM and N? only, assets M and O? only, or assets N and O? only? Usea? 50/50 split between the asset?pairs, and find the standarddeviation of each asset pair.
??States
Probability
Asset M Return
Asset N Return
Asset O Return
??Boom
29?%
13?%
22?%
5%
??Normal
53?%
11?%
15?%
11?%
??Recession
18%
5?%
2?%
13?%

Answer & Explanation Solved by verified expert

4.2 Ratings (612 Votes)

Expected return E Sum of probability asset return EM 029013 053011 018005 105 EN 029022 053015 018002 147 EO 029005 053011 018013 96 A When investment is done equally in all the three assets the returns would be the average for each scenario Boom 132253 133 See Answer

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Transcribed Image Text

Benefits ofdiversification.Sally Rogers has decided to invest her wealth equally across thefollowing three assets.??a.??What are her expected returns and the risk from herinvestment in the three? assets? How do they compare with investingin asset M? alone???Hint?:Find the standard deviations of asset M and of the portfolioequally invested in assets? M, N, and O.b.??Could Sally reduce her total risk even more by using assetsM and N? only, assets M and O? only, or assets N and O? only? Usea? 50/50 split between the asset?pairs, and find the standarddeviation of each asset pair.??StatesProbabilityAsset M ReturnAsset N ReturnAsset O Return??Boom29?%13?%22?%5%??Normal53?%11?%15?%11?%??Recession18%5?%2?%13?%

??States	Probability	Asset M Return	Asset N Return	Asset O Return
??Boom	29?%	13?%	22?%	5%
??Normal	53?%	11?%	15?%	11?%
??Recession	18%	5?%	2?%	13?%