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