Mr. K. Patel has an investment capital of Sh.1,000,000. He wishes to invest in two securities, A and B in the following proportion; Sh.200,000 in security A and Sh.800,000 in security B.
The returns on these two securities depend on the state of the economy as shown below:
Required:
i) Compute the expected portfolio return
ii) Determine the correlation coefficient between security A and security B
iii) Calculate the portfolio risk
iv) Calculate the reduction in risk due to portfolio diversification
ANSWER
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