Question

Security A offers an expected return of 14%, with a standard deviation of 8%. Security B offers an expected return of 11%, with a standard deviation of 6%. If you wish to construct a portfolio with a 12.8% expected return, what percentage of the portfolio will consist of security A?

Answer 1

Answer:

60%

Explanation:

Since the question suggests a combined expected return portfolio of 12.8%, we ignore the standard deviation for both of the securities.

The percentage of the portfolio will consist of security A, Wa =

(Combined portfolio expected return - expected return of security B) / (expected return of security A - expected return of security B)

Wa = (0.128 - 0.11) / (0.14 - 0.11)

Wa = 0.018/0.03

Wa = 0.60 = 60%