Question Three

1. Explain the effects of inadequate working capital to a firm
2. An investor 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	Probability	Return on Security A	Return on security B
Boom	0.4	18%	24%
Normal	0.5	14%	22%
Recession	0.1	12%	21%

1. Compute the expected portfolio return
2. Determine the correlation coefficient between security A and Security B and interpret it.
3. Calculate the portfolio risk as measured by standard deviation.