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 

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State of Economy Probability Returns on Returns on Security A Security B Вoom 0.4 18% 24% Normal 0.5 14% 22% Recession 0.1 12% 21% State of Economy Probability Returns on Returns on Security A Security B Вoom 0.4 18% 24% Normal 0.5 14% 22% Recession 0.1 12% 21%