An investor buys 1 share of ABC Ltd at the price of $30 on December 1, 2021. The firm is not expected to pay any dividends. Consider the following four possible scenarios for the share price on December 1, 2021

$55 with a probability of 12%
$39 with a probability of 60%
$25 with a probability of 19%
$15 with a probability of 9%

a) Calculate the expected return for holding the share for a year.

b) Calculate the variance of return and standard deviation of return.

c) On December 1, 2021, it turns out that the share is worth $38.5, and the investor also just received a dividend of $3.6. Calculate the total holding period return and capital gains return over the one-year period.

d) Discuss a benefit of portfolio diversification. Explain how to achieve this benefit.

Answer rating: 100% (QA)

SOLUTION a The expected return for holding the share for a year is calculated as follows Expected return 012 x 55 060 x 39 019 x 25 009 x 15 Expected ... View the full answer