Question

Consider the following statements. Which is/are incorrect?

I. The expected return of a portfolio of shares is the weighted average of the expected prices for each share
II. When a dividend is announced, the share is trading ex-dividend of which the share price should fall by the announced amount of dividend
III. In Australia, a capital gain realised from the sale of share within 12 months of purchase is taxed in full
IV. To consider dividend received for personal taxation purpose, one should begin by grossing up the franked dividend received by the franking credit and then include in the assessable income.
Select one:
a. I
b. IV
c. I and II
d. III and IV
e. I, III, and IV
f. II, III, and IV
g. I, II, III, and IV
h. None of the statements are correct

Answer 1

The incorrect statements are that the expected return of a portfolio is the weighted average of the expected prices of each share (I), and that the share price should fall by the exact amount of the announced dividend when trading ex-dividend (II).

Step-by-step explanation:

Among the given statements about investments, taxation, and dividends in the context of the Australian market, let us evaluate which ones are incorrect:

• I. The expected return of a portfolio of shares is not simply the weighted average of expected prices for each share. Rather, it is the weighted average of the expected returns on each share within the portfolio.
• II. Ex-dividend trading refers to shares trading without the right to receive the most recently declared dividend. It is true that when a share goes ex-dividend, the share price typically falls, but it doesn't always fall by the exact amount of the dividend.
• III. Capital gains tax in Australia is applied on the sale of shares, and if the shares are held for less than 12 months, the capital gain is indeed taxed in full. However, if they are held for more than 12 months, the gain may be eligible for a capital gains tax discount.
• IV. Franked dividends and personal taxation in Australia means that dividends paid out of profits where corporate tax has already been paid by the company, and thus, the franking credit is attached. Taxpayers include the grossed-up amount of the dividend, which includes the franking credits, in their assessable income for taxation purposes.

Therefore, the incorrect statements are I and II.