Question

benefits of diversification . 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?

hint find the standard deviations of Asset M and of the portfolio equally invested in assets M, N, O.

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, AssetM, AssetsN, AssetsO
boom.        30%            12%         22%          4%
Normal.     50%            10%         14%         10%
Recession 20%             4%           2%          12%

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

Answer 1