Question

a) Discuss the benefit of portfolio diversification. Explain how to achieve diversification benefit. (2 mark) An investor buys 1 share of ABC Ltd at the price of $32 on December 1, 2019. The firm is not expected to pay any dividends. Consider the following three possible scenarios for the share price on December 1, 2020: $50 with a probability of 20% $35 with a probability of 65% $23 with a probability of 15% b) Calculate the expected return for holding the share for a year. (2 mark) c) Calculate the variance of return and standard deviation of return. d) On December 1, 2020, the share is worth $38 and the investor just received a dividend of $3. Calculate the total holding period return and capital gains return over the one-year period. e) Explain the difference between expected return and realised return.

Answer 1