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

Average return for crown is 7.01%, Standard deviation for crown is 23.3%

Average return for Tencent is 38.90%, Standard deviation for Tencent is 48.5%

Average return for CBA is 3.80%, Standard deviation for CBA is 14.0%

1. (6 marks)

Calculate the correlation coefficient between (a) Crown and Tencent and (b) Tencent and CBA.

2. (3 marks)

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

3. (3 marks)

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

4. (4 marks)

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