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
d. Assume that Asset 1 of the diversified portfolio remains a
total loss (–100% return) and asset two earns no return.
Make a table showing how sensitive the portfolio returns are
to a 1-percentage-point change in the return of each of the
other three assets. That is, how is the diversified portfolio’s
value affected if the return on asset three is 4 percent or 6
percent? If the return on asset four is 9 percent or 11
percent? If the return on asset five is 11 percent? 13 percent?
How does the total portfolio value change if each of the three
asset’s returns are one percentage point lower than in the
table? If they are one percentage point higher?
e. Using the sensitivity analysis of (c) and (d), explain how the
two portfolios differ in their sensitivity to different returns on
their assets. What are the implications of this for choosing
between a single asset portfolio and a diversified portfolio?