Question

a) “The standard deviation of a portfolio's return cannot be reduced to zero by holding all the securities in the market.” True or false? Explain. (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 30% $35 with a probability of 60% $23 with a probability of 10% 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 $36 and the investor just received a dividend of $2.50. 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

a)This statement is True because all the securities in the market have some risk. the risk in the market can be reduced by diversying but cannot be Zero

b)

Share	Rate in $	Probability	Expected value in $
ABC LTD	50	0.3	15
ABC LTD	35	0.6	21
ABC LTD	23	0.1	2
			38

Expected Return In % = (38-32)/32=18.75%

d) Holding period Return:

Value at year end+ Dividend- Value at begining of the year)

Value at begining of the year

=36+2.5-32/32= 20.31 %

e)Expected return: The return which investor expects that he will receive at the time of initial investment . In our expample 18.75%

Realised Return: the return which he realises in cash.It is not notional or to be booked profit