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Medium · Finance · Quant Trader interview question · portfolio-allocation, expected-return, risk-budgeting, algebra
You are allocating a portfolio between two assets. Asset A has expected return $x>0$ per dollar invested, and Asset B has expected return $y>0$ per dollar invested. Let $w$ be the fraction of capital allocated to Asset A and $1-w$ the fraction allocated to Asset B, where $0\leq w\leq1$. Define each asset's expected-return contribution as its portfolio weight multiplied by its expected return: $$ \text{Contribution from A}=wx, \qquad \text{Contribution from B}=(1-w)y. $$ Choose $w$ so that the tw