Answer: Weighting scheme 1

The optimal portfolio with the highest Sharpe ratio is attained when the ratio of expected returns to Marginal VaR (Value at Risk) is equal for all assets in a portfolio. This is because the Sharpe ratio measures the risk-adjusted return of a portfolio, and by equalizing the ER/MVaR ratio, the portfolio is balanced in terms of risk and return. In the given scenario, the current ER/MVaR ratios for TOM and JRY are 2.25 and 1.20, respectively. The portfolio manager is considering three different weighting schemes to optimize the portfolio: 1. **Weighting Scheme 1**: TOM 50%, JRY 50%, resulting in ER/MVaR ratios of 1.68 for TOM and 1.68 for JRY. This scheme equalizes the risk-adjusted return for both assets, making it a candidate for the optimal portfolio. 2. **Weighting Scheme 2**: TOM 56%, JRY 44%, with ER/MVaR ratios of 1.49 for TOM and 1.82 for JRY. Here, the ratios are not equal, indicating that this scheme does not provide the optimal balance between risk and return. 3. **Weighting Scheme 3**: TOM 75%, JRY 25%, leading to ER/MVaR ratios of 1.15 for TOM and 3.44 for JRY. The disparity between the ratios is significant, making this scheme far from optimal. Given these calculations, **Weighting Scheme 1** is the closest to providing an optimal portfolio as it achieves the equal ER/MVaR ratio for both assets, which is the condition for maximizing the Sharpe ratio. Hence, the correct answer is B, Weighting Scheme 1.

Author: LeetQuiz Editorial Team