Question

Risk and return

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. Calculate the correlation coefficient between (a) Crown and Tencent and (b) Tencent and CBA
2. Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 50% in Crown and 50% in Tencent.  
3. Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 40% in CBA and 60% in Tencent.

Answer 1

1). Correlation between Crown & Tencent = 0.6392

Correlation between Tencent & CBA = 0.2975

2). Portfolio consisting of 50% Crown and 50% Tencent:

Average return = 22.95%; Standard deviation = 0.3106

3). Portfolio consisting of 40% Tencent & 60% CBA:

Average return = 24.86%; Standard deviation = 0.2944

The excel calculations are as follows:

Formulas:

Note: Since the question did not mention manual calculations, Excel formulas have been used for the calculations. If manual calculations are required, please mention so in a comment below.