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

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

b) 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. (2 marks)

An investor buys 1 share of Zephyr Ltd at the price of $38 on January 1, 2020. The firm is not expected to pay any dividends. The investor believes that the share price on January 1, 2021 will be one of the three following values:

• $56, with a probability of 35%
• $42, with a probability of 55%
• $24, with a probability of 10%

c) Calculate the expected return for holding the share for a year. (2 marks)

d) Calculate the variance of return and standard deviation of return. (2 marks)

e) On January 1, 2021, the share is worth $43.50 and the investor just received a dividend of $3.5. Calculate the total holding period return and capital gains return over the one-year period. (2 marks)

Answer:

Please include ALL working