Please answer all questions with explanations thx P8-23 (similar to)E Question HelpBenefits of diversification. Sally Rogers has decided to invest her wealth equally across the following three assets: . What are her expected returns and therisk 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 theportfolio equally invested in assets M, N, and O.What is the expected return of investing equally in all three assets M, N. and 0?% (Round to two decimal places.)Data Table(Click on the following icon o in order to copy its contents into a spreadsheet.)StatesProbabilityAsset M ReturnAsset N ReturnAsset O ReturnВоom34%11%20%3%Normal51%9%13%9%Recession15%3%0%11%Enter your aAnswer4partsremainingPrintDone&*#$%8.2tyerfgaSCVctraltalt

Answered: What is the expected return of…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 13P

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Please answer all questions with explanations thx

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:

$E x p e c t e d r e t u r n = (R e t u r n o f A s s e t M \times W e i g h t o f A s s e t M) + (R e t u r n o f A s s e t N \times W e i g h t o f A s s e t N) + (R e t u r n o f A s s e t O \times W e i g h t o f A s s e t O) = (11 % \times 33 %) + (20 % \times 33 %) + (3 % \times 33 %) = 11.22 %$

Hence, the expected return is 11.22%.

Step 3

Compute the expected return if the state is normal using the equation as shown below:

$E x p e c t e d r e t u r n = (R e t u r n o f A s s e t M \times W e i g h t o f A s s e t M) + (R e t u r n o f A s s e t N \times W e i g h t o f A s s e t N) + (R e t u r n o f A s s e t O \times W e i g h t o f A s s e t O) = (9 % \times 33 %) + (13 % \times 33 %) + (9 % \times 33 %) = 10.23 %$

Hence, the expected return is 10.23%.

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