Question

In: Finance

An investor buys 1 share of ABC Ltd at the price of $32 on December 1,...

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% $34 with a probability of 50% $27 with a probability of 15% $20 with a probability of 15% a) Calculate the expected return for holding the share for a year. b) Calculate the variance of return and standard deviation of return. c) Explain the concept of diversification. Explain the benefit of diversification and how it works. d) “The standard deviation of a portfolio's return can be reduced to zero by holding all the securities in the market.” True or false? Explain.

Solutions

Expert Solution


Related Solutions

An investor buys 1 share of ABC Ltd at the price of $32 on December 1,...
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...
An investor buys 1 share of ABC Ltd at the price of $32 on December 1,...
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...
An investor buys 1 share of ABC Ltd at the price of $32 on December 1,...
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% $34 with a probability of 50% $27 with a probability of 15% $20 with a probability of 15% a) Calculate the expected return for holding the share for a year. b) Calculate the variance...
An investor buys 1 share of ABC Ltd at the price of $32 on December 1,...
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% $34 with a probability of 50% $27 with a probability of 15% $20 with a probability of 15% a) Calculate the expected return for holding the share for a year. b) Calculate the variance...
An investor buys a European call on a share for $5. The current stock price is...
An investor buys a European call on a share for $5. The current stock price is $102 and the strike price is $100. (a) Under what circumstances will the investor make a profit (have positive profit) on the expiration date? (b) Under what circumstances will the option be exercised on the expiration date? (c) Please draw a diagram showing how the investor’s profit depends on the stock price on the expiration date. To put it another, draw a diagram showing...
In December 2017, an American investor buys 1,000 shares in a Mexican company at a price...
In December 2017, an American investor buys 1,000 shares in a Mexican company at a price of 500 pesos each. The share does not pay any dividend. A year later she sells the shares for 550 pesos each. Assume the exchange rate when she buys the stock is 19.131. Suppose that the exchange rate at the time of sale is 20 pesos = $1, answer the following requirements. a. How many dollars does she invest? (Do not round intermediate calculations....
Mr. Suphi buys 100 shares of ABC stock on margin. The share price is $50 and...
Mr. Suphi buys 100 shares of ABC stock on margin. The share price is $50 and the initial margin is 50%. What is the maintenance margin on the account if the margin call is triggered at a share price of $35? Ignore the interest on the loan. b) Mr. Suphi buys 200 shares of EFG stock on margin. The share price is $60 and the initial margin is 50%. What is Mr. Suphi’s rate of return on equity if he...
An investor buys a share of stock for $40 at time t = 0, buys another...
An investor buys a share of stock for $40 at time t = 0, buys another share of the same stock for $50 at t = 1, and sells both shares for $60 each at t = 2. The stock paid a dividend of $1 per share at t = 1 and at t = 2. The periodic money weighted rate of return on the investment is closest to: 23.0% 22.2% 23.8%
If in Cash market price of share of ABC ltd is $1000, risk free rate is...
If in Cash market price of share of ABC ltd is $1000, risk free rate is 10% pa and maturity period of futures is 3 months what would be the fair price of the futures of ABC ltd taking the value of e as 2.71? Select one: a. $1002.30 b. $ 1010.50 c. $1006.25 d. $1009.80
1. An investor purchases 200 shares of ABC stock on margin. The current price of ABC...
1. An investor purchases 200 shares of ABC stock on margin. The current price of ABC stock is $85 per share, the initial margin requirement is 60% and the maintenance margin requirement is 25%. A)   What is the dollar amount of the loan the investor receives from her broker for this margin purchase? B)   How far can the stock price fall before the investor gets a margin call
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT