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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.

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

c) On December 1, 2022, 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.

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.