QUESTION ONE Mr. Kamau has an investment capital of Sh.2,000,000. He wishes to invest in two securities, A and B in the following proportion: Sh.400, 000 in security A and Sh.1, 600,000 in security B. The returns on these two securities depend on the state of the economy as shown below: State of Economy Boom Normal Recession Probability 0.4 0.5 0.1 Returns on Security A 16% 14% 12% Returns on Security B 24% 21% Required: i Compute the expected portfolio return ii. Determine the correlation coefficient between security A and security B i Calculate the portfolio risk iv. Calculate the reduction in risk due to portfolio diversification 1 mark) (5 marks) (1 mark) (3 marks) (Total: 10 marks)