You are considering an investment in the stock market and have identified three potential stocks, they are Crown (ASX: CWN), Tencent (HKG: 0700) and Commonwealth Bank (ASX: CBA). The historical prices for the past 10 years are shown in the table below. Assume no dividend is distributed during this period.
Year | Crown | Tencent | Commonwealth (CBA) |
2010 | 7.76 | 29.04 | 53.63 |
2011 | 8.57 | 40.40 | 52.15 |
2012 | 8.09 | 37.94 | 50.39 |
2013 | 11.59 | 54.28 | 64.10 |
2014 | 16.68 | 108.70 | 73.83 |
2015 | 13.61 | 132 | 88.85 |
2016 | 12.27 | 144.90 | 78.67 |
2017 | 11.4 | 204.40 | 81.66 |
2018 | 13.25 | 463.60 | 78.87 |
2019 | 11.95 | 346 | 69.91 |
1. (6 marks)
Calculate the return and risk (standard deviation) of each stock.
2. (3 marks)
Explain the relation (positive or negative) between risk and return based on your answers in part (1).
3. (6 marks)
Calculate the correlation coefficient between (a) Crown and Tencent and (b) Tencent and CBA.
4. (3 marks)
Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 50% in Crown and 50% in Tencent.
5. (3 marks)
Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 40% in CBA and 60% in Tencent.
6. (4 marks)
Which portfolio (parts 4 or 5) provides better diversification? Explain your answer(s).
1.
| stock | crown | Tencent | commonwealth |
| average return | 7.01% | 38.9% | 3.8% |
| risk | 23.3% | 48.51% | 13.96% |
| year | crown | RETURN | Tencent | RETURN | commonwealth | RETURN |
| 2010 | 7.76 | 29.04 | 53.63 | |||
| 2011 | 8.57 | 10.44% | 40.4 | 39.12% | 52.15 | -2.76% |
| 2012 | 8.09 | -5.60% | 37.94 | -6.09% | 50.39 | -3.37% |
| 2013 | 11.59 | 43.26% | 54.28 | 43.07% | 64.1 | 27.21% |
| 2014 | 16.68 | 43.92% | 108.7 | 100.26% | 73.83 | 15.18% |
| 2015 | 13.61 | -18.41% | 132 | 21.44% | 88.85 | 20.34% |
| 2016 | 12.27 | -9.85% | 144.9 | 9.77% | 78.67 | -11.46% |
| 2017 | 11.4 | -7.09% | 204.4 | 41.06% | 81.66 | 3.80% |
| 2018 | 13.25 | 16.23% | 463.6 | 126.81% | 78.87 | -3.42% |
| 2019 | 11.95 | -9.81% | 346 | -25.37% | 69.97 | -11.28% |
| AVERAGE RETURN | 7.01% | 38.90% | 3.80% | |||
| STANDARD DEVIATION | 23.30% | 48.51% | 13.96% | |||
| CROWN AND TENCENT | TENECENT AND CBA | |||||
| CORREALTION | 0.42 | 0.54 |
2. relation between risk and return is higher the risk higher the return since Tencent has the biggest risk it has the largest average return as well. similarly, Commonwealth has the lowest risk and so the least average return
3.
| CROWN AND TENCENT | TENECENT AND CBA | |||||
| CORREALTION | 0.42 | 0.54 |
Risk and return You are considering an investment in the stock market and have identified three potential stocks, they are Shanghai Fosun Pharmaceutical Group (HKG: 2196), China Petroleum & Chemical Corporation (HKG: 386) and Commonwealth Bank (ASX: CBA). The historical prices between 2013 and 2020 in the table below, note that these prices are recorded on the 1st day of the year, for example, 1st of January 2020. Students assume no dividend is distributed during this period and ignore the...
> Answer to the part 4, 5, 6 is not given. Please update the same. Thank You
Bijay Agrawal Sun, Nov 21, 2021 7:06 PM