Question

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You are considering an investment in the stock market and have identified two potential stocks, they are Westpac Banking Corp. (ASX: WBC) and Singapore Airlines Ltd. (SGX: C6L). The historical prices for the past 10 years are shown in the table below.

in the table below.

Year	ASX: WBC	SGX: C6L
2009	23.70	13.82
2010	22.85	14.76
2011	21.01	11.1
2012	27.85	10.99
2013	30.66	9.59
2014	34.23	12.65
2015	30.85	11.03
2016	31.71	9.9
2017	30.96	11.31
2018	24.55	9.65

1. Which stocks would you prefer to own? Would everyone make the same choice? Explain your answer(s).

2. Calculate the correlation coefficient between the two stocks. Does it appear that a portfolio consisting of WBC and C6L would provide good diversification? Explain your answer(s).

3. Calculate the expected (annual) return if you owned a portfolio consisting of 50% in WBC and 50% in C6L. Would you prefer the portfolio to owning either of the stocks alone?

Answer 1

1. Answer

Particulars	Stock ASX WBC	Stock : SGX C6L
Expected Return	27.837	11.48
Risk ( Standard Deviation)	4.27	1.66

Stock ASX WBC is having an higher return with higher Risk where as Stock SGX C6L is having lower return for lower risk...

So risk lovers will take Stock WBC we as lover neutrals will take Stock C6L...

Other wise we can find risk coefficient ….

Particulars	Stock WBC	Stock C6L
Expected Return	27.837	11.48
Risk ( Standard Deviation)	4.27	1.66
Return/risk	6.519	6.915

So even risk efficient is Same for both stock .

It defines the return taken for each % of risk …..In both stock it is around so it depends upon the person taking the risk to select any stock.

2. Correlation already as given above it is -0.32

So risk decreases when we investment in both security as portfolio ..I.e if one stock return fall other Stock return gains so rsik of over all portfolio reduces ,..... It is an good diversification since risk reduces.. as correlation is negative …

3. Expected return of portfolio is (0.5*23.7837)+(0.5*11.48) = 17.63185

Expected risk is = 4.11....

I would prefer this portfolio when compared to alone stock since getting More return and risk low …

And even it depends upon person /… since efficient frontiner at here ..

Formulas for Risk of portfolios is .

and given all formulas used...

First one is calculating SD of single stock

Next one is for Portfolio...