QUESTION START

do not use excel formula

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)