3) a. Explain the meaning of risk return trade-off in investment decision. [4 marks] b. Distinguish between market risk and unique risk. [6 marks] c. Assume that your friend wants to start a business by selling cement only, which he thinks has very little risk. You agree that trading in cement is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the five year returns data from Agyapaye Company which deals with cement only and Okouba Company which deals with iron rods only as shown in the table below. Year Agyapaye Okouba 2011 40.00% 40.00% 2012 10.00% 15.00% 2013 35.00% 5.00% 2014 5.00% 10.00% 2015 15.00% 35.00%

Guided by the data determine how much will your friend's risk will reduce if he holds a portfolio consisting of 60% in Agyapaye and the remainder in Okouba? [8 marks] d. You anticipate that a year after the start of the business, the economy will experience business cycle such that economic conditions will be strong, normal, or weak, and that the firm's returns will have the probability distribution shown below. Economic Conditions Prob. Return Strong 30% 32.0% Norma l 40% 10.0% Weak 30% 16.0% Estimate the expected returns and associated risk. [7 marks]