Part 2 (25 marks) risk and return You are considering investing in stocks and have identified the following potential stocks. They are Alibaba Group Holding Limited (BABA), Amazon (AMZN), Kogan (KGN) and China Petroleum 8: Chemical (386). The table below shows the historical share prices (5) between 2016 and 2022. Note that these prices are recorded on the 1St day of the year, for example, 1St ofJanuary 2020. Students should assume no dividend is distributed during this period and ignore the exchange rate conversion. Year Amazon Alibaba Kogan China Petroleum & Chemical (NASDAQ: AMZN) (NYSE: BABA) (ASX: KZN) (HKG: 386) 2016 587 67.03 1.715 4.33 2017 823.48 101.31 1.53 6.21 2018 1450.89 204.29 7.15 6.76 2019 1718.73 168.49 4.3 6.57 2020 2008.72 206.59 5.16 4.13 2021 3206.2 253.83 17.99 3.17 2022 2991.47 125.79 6.19 4.08 1. (2 marks) Provide a discussion on the similarities and differences of two companies: China Petroleum 8; Chemical and Alibaba. Minimum four key points for full marks. Hints: students may consider the foiiowing when attempting this question. 0 What services/products each company offers? 0 Which industry the company operates in? 0 Where their stocks are iisted? 0 Where the company is found? Do not forget to cite the source of information. Referencing (Chicago 178 referencing) is mandatory. While Alibaba and China Petroleum & Chemical, otherwise known as Sinopec are both headquartered in China they both operate in very different industries. While Alibaba operates in the e-commerce industry Sinopec operates in production in energy. Further differences include; being listed on different stock exchanges (Alibaba on the New York Stock Exchange and Sinopec on the Hong Kong Stock Exchange), Sinopec is exposed to environmental concerns and volatile oil prices while Alibaba's challenges relate more to the state of the economy and competition and regulatory requirements. Some similarities include both companies have a massive global presence and are international market leaders in their respective industries. . (8 marks) Calculate the return and risk (standard deviation) of each stock. Amazon = 415% return & 0.3055 standard deviation (30.055% risk) Alibaba = 88% return & 0.5292 standard deviation (52.9224% risk) Egg = 261% return & 1.7784 standard deviation (1.778406% risk) China Petroleum 8: Chemical = -6% return 8!. 0.3054 standard deviation (30.536596 risk) . (2 marks) Explain the relation (positive or negative) between risk and return based on your answers in the previous question. Based on the previous answer there definitely seems to be a positive correlation between risk and return. Stocks that have higher returns tend to also have higher risks and stocks with lower returns tend to have lower risk. it must be noted that this is not the case for all the stocks given but generally the correlation seems to be positive . (4 marks) Calculate the correlation coefficient between (1) Amazon and Alibaba, and (2) Amazon and China Petroleum & Chemical. Amazon and Alibaba = 0.6427 {strong positive linear correlation) Amazon and China Petroleum 8: Chemical = -0.5749 (moderate negative linear correlation) . (3 marks) Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 50% in Amazon and 50% in Alibaba. Expected annual return = 27.918896 (16.6666%*40%)+(16.6666%*76%)+(16.6666%*18%)+(16.6666%*17%)+(16.6666%* 60%)+(16.6666%*-7%) + (16.6666%*51%)+(l6.6666%*102%)+(16.6666%*- 18%)+(16.6666%*23%)+(16.6666%*23%)+(16.6666%*-50%) / 2 Standard Deviation = 0.1453 (0.5)\"2*(0.3055)A2+(0.5)"'2*(0.5292)"2+2*(0.5)*(0.5)*(0.6427)*(0.3055)*(0.5292) . (3 marks) Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 80% in Amazon and 20% in China Petroleum. 6. (3 marks) Calculate the expected (annual) return and standard deviation if you owned a portfolio consisting of 80% in Amazon and 20% in China Petroleum. Page 6 of 7 Expected annual return = 27.8756% 0.8x(16.6666%x40%)+g16.6666%*76%)+{16.6666%*18%)+(16.6666%*17%)+(16.6666 %*60%) + 0.2x(16.6666%*43%)+(16.6666%*9%)+{16.6666%*-3%)+(16.6666%*- 37%)+(16.6666%*-23%)+(16.6666%*29%) Standard Deviation = 0046299079 (%2*(0.3055)\"2+(0.2)\"2*(0.305365)A2+2*{0.8)*(0.2)*(negative0.5749)*(0.3055)* (0.305365) 7. (3 marks) Compare the portfolios in parts 5 or 6. Which portfolio (parts 5 or 6) provides better diversification? Define diversification and explain your answer(s). The Amazon and China Petroleum gives better diversification as you are exposed to less risk (0.0463 standard deviation) vs (0.1453 standard deviation) in portfolio 5 while having a similar expected annual return. Diversification relates to limiting your risk by having stocks in % portfolio that have various rates of risk and return. Spreading your investment across different stocks means that your risk is also spread out reducing the portfolios downside