11 B - do not know where you are seeing portfolio B as the best one.
Book says A is the best one… (solution). and that is not based on return needed. that is purely based on the cash / liquidity immediately needed perspective.
and they state -
Portfolio A is the most appropriate portfolio for the Muellers. Because their pension income will not cover their annual expenditures, the shortfall will not likely be met by the return on their investments, so the 10 percent cash reserve is appropriate. As the portfolio is depleted over time, it may be prudent to allocate more than 10 percent to cash equivalents. The income deficit will be met each year by a combination of investment return and capital invasion.
Now that their daughter is financially independent, the Muellers’ sole objective for their personal portfolio is to provide for their own living expenses. Their willingness and need to accept risk is fairly low. Clearly, there is no need to expose the Muellers to the possibility of a large loss. Also, their health situation has considerably shortened their time horizon. Therefore, a 70 percent allocation to intermediate-term high-grade fixed-income securities is warranted.
The income deficit will rise each year as the Muellers’ expenses rise with inflation, but their pension income remains constant. The conservative 20 percent allocation to equities should provide diversification benefits and some protection against unanticipated inflation over the expected maximum 10-year time horizon.
Portfolio B, the second-best portfolio, has no cash reserves, so it could not meet the Muellers’ liquidity needs. Also, although it has a higher expected return, Portfolio B’s asset allocation results in a somewhat higher standard deviation of returns than Portfolio A.
Portfolios C and D offer higher expected returns but at markedly higher levels of risk and with relatively lower levels of current income. The Muellers’ large income requirements and low risk tolerance preclude the use of Portfolios C and D.
I guess it makes it pretty clear … Though I am clearly not confident in the heat of the exam I will be able to state anything.