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. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability Asset M Return Boom 27% 12% Normal 53% 9% Recession 20% 0% Asset N Return 22% Asset O Return 0% 14% 9% 2% 12%
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. Data table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability Asset M Return Boom 27% 12% Normal 53% 9% Recession 20% 0% Asset N Return 22% Asset O Return 0% 14% 9% 2% 12%
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 4SBD
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Transcribed Image Text: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.
Data table
(Click on the following icon in order to copy its contents into a spreadsheet.)
States
Probability
Asset M Return
Boom
27%
12%
Normal
53%
9%
Recession
20%
0%
Asset N Return
22%
Asset O Return
0%
14%
9%
2%
12%
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