Question

Question 1) a. Explain the assertion that the relationship between the standard deviation on a portfolio and standard deviations of the assets in the portfolio is not a simple one. b. Briefly discuss the concept of the Security Market Line (SML), and explain why all assets must plot directly on it in a competitive market. c. The dividend debate is inconclusive and still on-going in the corporate world. In your view, briefly discuss some real world factors that may support the payment of high and low dividends.

Answer 1

1.a. Relationship between standard deviation on a Portfolio and standard deviation of the assets in a Portfolio is a very complex as it is dependent upon risk weighting of all those assets as well as correlation assessment of assets in relation of one another. Standard deviation is also calculated and compared after ascertainment of deviation from the mean so it is a highly complex process.

1.b. Concept of security market line is about plotting expected rate of return which is reflected through Capital Asset pricing model against the systematic risk of the market which is is reflected as beta.

all assets must plot directly on security market line because risk to reward ratio of all assets in a competitive market is similar and hence it must be plotting directly in a competitive market on security market line.

1.(c) Real world factors that support the payment of high and low dividend as follows-

1.life cycle of company as growth companies pay lesser dividend and mature company pay more dividend.

2. Rate of return on investment is higher than the company adopt for lower dividend and vice versa

3. Dividend payments is also related to expectation of shareholders and movement of share price in relation to dividend.

4. If any country is providing with the tax advantage then dividend should be e e announced as it would be tax advantageous.