Jameson decided to create a portfolio of two companies, KCCB and NIIC. He invested Ksh 600,000 and 900,000 in shares of KCCB and NIIC respectively at beginning of the year at Ksh 25 and Ksh 40 respectively. At the end of the year, three economic conditions are projected with respective probabilities. Further information is provided in table below.

KCCB

NIIC

Economic condition

Probability

Price per share

Dividend per share

Price per share

Dividend per share

Recession

0.3

28

2

45

3

Average

0.3

20

3

42

2

Boom

0.4

25

2

48

2

Required.

a. Compute the expected return and risk of this portfolio for one year

b. Suppose to this portfolio, an additional ksh 500,000 worth of risk free asset was added with a return of 6%,

i. Develop the equation of efficient portfolio

ii. Compute the risk and return of combined risk free and risky assets portfolio 20 marks