Investment decisions largely depend upon risk and return factors. Investors have to consider both risk and the return to maximize their profits. In an effort to increase the return, investors have to bear a high risk. Mostly investors are risk-avers and they try to reduce the risk by using different techniques. Among different techniques of risk reduction, diversification is the most commonly used method of reducing the risk. Diversification is attained through adding different securities to form a portfolio which helps in reducing the risk. A well diversified portfolio not only reduces the risk but also increases the profit for the investor. A rational investor tries to construct a portfolio that maximizes the risk and minimizes the return. Suppose Mr. Ahmed has some money to invest in stock market and he is initially considering following two stocks for portfolio construction: Stock A Probability of Return occurrence of Stock B Probability of Return occurrence of return return 35% 15% 40% 20% 25% 15% 20% 15% 30% 20% 50% 16% You are required to help Mr. Ahmed to analyse risk and return of stocks and to allocate a suitable proportion between two stocks. In order to help him, you are required to: Calculate expected return of each stock Calculate risk for each stock Based on risk and return of stocks, you have to allocate 40:60 proportion of Mr. Ahmed's investment between the two stocks. Note that Mr. Ahmed is a risk averse investor