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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
5
Initial investment
$10,000
Amount invested per asset
2000
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
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