### What happens to the value of the diversified portfolio

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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 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

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