For dollar amounts, give your answer to the nearest cent. For interest rates, give our answer as a percentage rounded to 2 decimal places.

If any parts of the question use values from earlier parts, use theEXACTvalues from earlier parts.

QUESTION START

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. (2 marks)

b) Calculate the variance of return and standard deviation of return. (3 marks)

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. (2 marks)

d) Discuss a benefit of portfolio diversification. Explain how to achieve this benefit. (2 marks)

e) "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. (1 mark)