Part 2 (25 marks)

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 1^st day of the year, for example, 1^st of January 2020. Students assume no dividend is distributed during this period and ignore the exchange rate conversion.

Year	Fosun (HKG: 2196)	China Petroleum & Chemical (HKG: 386)	Commonwealth (ASX: CBA)
2013	11.62	7.24	64.10
2014	23.85	6.18	73.83
2015	28.05	6.13	88.85
2016	18.54	4.33	78.67
2017	25.9	6.21	81.66
2018	45.45	6.76	78.87
2019	23.85	6.57	69.91
2020	20.9	4.13	85.26

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) Fosun and China Petroleum and (b) China Petroleum and CBA.

4. (3 marks)

Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 50% in Fosun and 50% in China Petroleum.

5. (3 marks)

Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 40% in CBA and 60% in China Petroleum.

6. (4 marks)

Which portfolio (parts 4 or 5) provides better diversification? Explain your answer(s).