Answer: Asset JKL

The portfolio manager should select Asset JKL. This decision is based on the evaluation of marginal Value at Risk (VaR) and Jensen's Alpha for each asset. Marginal VaR is calculated as the ratio of the portfolio's VaR to its value multiplied by the asset's beta. Since the ratio (VaRp/Valuep) remains constant for all assets, the asset with the lowest beta will have the lowest marginal VaR. Among the options, Asset JKL has the lowest beta of 0.90. Jensen's Alpha is calculated by subtracting the expected return based on systematic risk from the actual return of the asset. The formula for Jensen's Alpha is: \[ \text{Jensen's Alpha} = \text{Actual return} - (\text{risk-free rate} + (\text{Market return} - \text{risk-free rate}) \times \text{Beta}) \] The market risk premium is the difference between the expected market return and the risk-free rate, which is 5% in this case (0.08 - 0.03 = 0.05). For each asset, the Jensen's Alpha is calculated as follows: - **Asset BDE**: Actual return 14%, Beta 1.20, Expected return 9.0%, Jensen's Alpha 5.0% - **Asset JKL**: Actual return 13%, Beta 0.90, Expected return 7.5%, Jensen's Alpha 5.5% - **Asset MNO**: Actual return 13%, Beta 1.00, Expected return 8.0%, Jensen's Alpha 5.0% - **Asset STU**: Actual return 10%, Beta 0.80, Expected return 7.0%, Jensen's Alpha 3.0% The portfolio manager is looking for an asset with a Jensen's Alpha greater than or equal to the market risk premium. All assets except Asset STU meet this criterion. Among these, Asset JKL has the lowest marginal VaR due to its lowest beta and also has a Jensen's Alpha greater than the market risk premium. Therefore, Asset JKL is the correct choice.

Author: LeetQuiz Editorial Team