Question ID: 649

This question is worth 10 marks in total. This is a written calculation question, and you should perform the necessary calculations/working on paper to later be scanned and uploaded. Start a new page for this question. 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 the EXACT values from earlier parts.

QUESTION START

An investor buys 1 share of Quinjett Ltd at the price of $40 on December 1, 2019. The firm is not expected to pay any dividends. Consider the following four possible scenarios for the share price on December 1, 2020:

• $55 with a probability of 10%
• $46 with a probability of 55%
• $34 with a probability of 25%
• $27 with a probability of 10%

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) Explain the concept of diversification. Explain the benefit of diversification and how it works. (3 marks)

d) Give one example of a diversifiable risk, and one example of a systemic risk. Clearly label your examples. (2 marks)