ABC, is an asset management company that invest the pooled funds of retail investors in securities in line with the stated investment objectives. The company has a market research team that helps gather financial information and analyze the targeted securities performance.

ABC aim to form a portfolio that could offer a good chance for diversification and is now considering first combining two potential stocks, Mad Bhd and Pad Bhd in this newly formed portfolio.

Four economic scenarios are postulated, and the return from each security is computed under each scenario, the returns with their estimated probabilities are shown in the following table:

Probability	Bad (0.25)	Average (0.25)	Good (0.25)	Excellent (0.25)
Mad Bhd	-0.04	0.06	-0.07	0.12
Pad Bhd	0.07	0.02	0.2	-0.13

ABC has set aside a total fund of RM1,000,000 for this portfolio investment.

Required:

1. Based on the data given in the table(without any calculation)

1. deduce the correlation between the rates of return of the two securities.
2. Evaluate whether diversification could be achieve by combining these securities.

2. Perform the necessary calculations and justify answers in (a)
3. Suggest on the allocation of the funds if ABC wants to earn an expected return of 0.0168 from this portfolio.