Answer: Asset 1.

## Explanation To maximize risk-adjusted returns, we need to consider both the expected returns and the diversification benefits from the correlation structure. **Key Analysis:** 1. **Expected Returns:** - Asset 1: Not specified but implied to be higher than others - Asset 2: Not specified but implied to be higher than Asset 3 - Asset 3: 15% 2. **Correlation Analysis:** - Asset 1 has **negative correlations** with both Asset 2 (-0.1) and Asset 3 (-0.2) - Asset 2 has positive correlation with Asset 3 (0.3) - Asset 3 has positive correlation with Asset 2 (0.3) 3. **Diversification Benefits:** - Asset 1 provides the best diversification benefits due to its negative correlations with both other assets - Negative correlations reduce portfolio risk significantly - Assets 2 and 3 have positive correlation, meaning they tend to move together 4. **Risk-Adjusted Returns:** - Asset 1 likely has the highest Sharpe ratio due to: - Potentially higher expected returns - Strong diversification benefits from negative correlations - Lower contribution to overall portfolio risk **Conclusion:** Asset 1 should receive the largest portfolio allocation because it offers the best combination of expected return and diversification benefits, leading to superior risk-adjusted returns.

Author: LeetQuiz Editorial Team