What is the expected return of investing equally in all three assets M, N, and 0? % (Round to two decimal places.) A Data Table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability Asset M Return Asset N Return Asset O Return Boom 34% 11% 20% 3% Normal 51% 9% 13% 9% Recession 15% 3% 0% 11% Enter your a parts remaining Print Done 4
What is the expected return of investing equally in all three assets M, N, and 0? % (Round to two decimal places.) A Data Table (Click on the following icon in order to copy its contents into a spreadsheet.) States Probability Asset M Return Asset N Return Asset O Return Boom 34% 11% 20% 3% Normal 51% 9% 13% 9% Recession 15% 3% 0% 11% Enter your a parts remaining Print Done 4
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Please answer all questions with explanations thx
![**Problem P8-23: Benefits of Diversification**
Sally Rogers has decided to invest her wealth equally across the following three assets: M, N, and O. 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.
**Question:**
What is the expected return of investing equally in all three assets M, N, and O?
\[ \% \] (Round to two decimal places.)
---
**Data Table:**
*States, Probability, Asset M Return, Asset N Return, Asset O Return*
- **Boom**
- Probability: 34%
- Asset M Return: 11%
- Asset N Return: 20%
- Asset O Return: 3%
- **Normal**
- Probability: 51%
- Asset M Return: 9%
- Asset N Return: 13%
- Asset O Return: 9%
- **Recession**
- Probability: 15%
- Asset M Return: 3%
- Asset N Return: 0%
- Asset O Return: 11%
---
This table can be used to calculate the expected returns and risks by considering the probabilities of each economic state (Boom, Normal, Recession) and their respective returns for each asset.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1d2d267b-f51c-4e80-81d6-95aed549da9b%2F72b671c5-4649-4a00-8952-3e8d25cc2a47%2Fa4fgxg_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Problem P8-23: Benefits of Diversification**
Sally Rogers has decided to invest her wealth equally across the following three assets: M, N, and O. 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.
**Question:**
What is the expected return of investing equally in all three assets M, N, and O?
\[ \% \] (Round to two decimal places.)
---
**Data Table:**
*States, Probability, Asset M Return, Asset N Return, Asset O Return*
- **Boom**
- Probability: 34%
- Asset M Return: 11%
- Asset N Return: 20%
- Asset O Return: 3%
- **Normal**
- Probability: 51%
- Asset M Return: 9%
- Asset N Return: 13%
- Asset O Return: 9%
- **Recession**
- Probability: 15%
- Asset M Return: 3%
- Asset N Return: 0%
- Asset O Return: 11%
---
This table can be used to calculate the expected returns and risks by considering the probabilities of each economic state (Boom, Normal, Recession) and their respective returns for each asset.
Expert Solution
Step 1
Expected return:
First, it is required to compute the expected return of each state. Then the return of each state would be multiplied with the probability of each state and then take the sum of all three figures to get the expected return of the portfolio.
Step 2
Since an equal amount is invested in all three assets, the weight of each asset would be 33%.
Compute the expected return if the state is boom using the equation as shown below:
Hence, the expected return is 11.22%.
Step 3
Compute the expected return if the state is normal using the equation as shown below:
Hence, the expected return is 10.23%.
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