What happens to the value of the diversified portfolio

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Reference no: EM13264925

Construct a spreadsheet to replicate the analysis of the table. That is, assume that $10,000 is invested in a single asset that returns 7 percent annually for twenty-five years and $2,000 is placed in five different investments, earning returns of 100 percent, 0 percent, 5 percent, 10 percent, and 12 percent, respectively, over the twenty-year time frame. For each of the questions below, begin with the original scenario presented in the table:

a. Experiment with the return on the fifth asset. How low can the return go and still have the diversified portfolio earn a higher return than the single-asset portfolio?

b. What happens to the value of the diversified portfolio if the first two investments are both a total loss?

c. Suppose the single-asset portfolio earns a return of 8 percent annually. How does the return of the single-asset portfolio compare to that of the five-asset portfolio? How does it compare if the single-asset portfolio earns a 6 percent annual return?

Diversification Illustration (Invest $10,000 over 25 years)
Investment Strategy 1: All funds in one asset			Investment Strategy 2: Invest Equally in five different assets
Number of assets	1		Number of assets		5
Initial investment	$10,000		Amount invested per asset		2000
Number of years	25		Number of years		25
Annual asset return		7%		5 asset returns (annual)
Total accumulation at the end of time frame: Total funds		$54,274.33		?100%
Asset 1 return
Asset 2 return			0%
Asset 3 return			5%
Asset 4 return			10%
Asset 5 return			12%
Total accumulation at the end of time frame:
Asset 1			$0.00
Asset 2			$2,000
Asset 3			$6,772.71
Asset 4			$21,669.41
Asset 5			$34,000.13
Total funds			$64,442.25

Reference no: EM13264925

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