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25 August, 11:13

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?

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  1. 25 August, 14:40
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    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%
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