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Answer: Candidate 1
## Explanation To determine the optimal allocation that maximizes the Sharpe Ratio, we need to find the portfolio where the Marginal VaR (MVaR) for both assets is equal. This is because at the optimal portfolio, the risk-adjusted returns should be equal across all assets. ### Key Concept: At the optimal portfolio that maximizes the Sharpe Ratio: - **MVaR_A = MVaR_B** - This indicates that the marginal contribution to risk is equal for both assets ### Analysis of Candidates: **Candidate 1 (55% A, 45% B):** - MVaR_A = 0.0546 - MVaR_B = 0.0546 - **MVaR_A = MVaR_B** ✓ **Candidate 2 (45% A, 55% B):** - MVaR_A = 0.0584 - MVaR_B = 0.0490 - MVaR_A ≠ MVaR_B **Candidate 3 (60% A, 40% B):** - MVaR_A = 0.0660 - MVaR_B = 0.0440 - MVaR_A ≠ MVaR_B **Candidate 4 (40% A, 60% B):** - MVaR_A = 0.0742 - MVaR_B = 0.0581 - MVaR_A ≠ MVaR_B ### Conclusion: Only **Candidate 1** has equal Marginal VaR values for both assets (0.0546), which indicates this is the optimal portfolio allocation that maximizes the Sharpe Ratio. Therefore, XYZ Investment Firm should hire Candidate 1. **Answer: D. Candidate 1**
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XYZ Investment Firm is interviewing four portfolio managers for a senior portfolio management position. The firm has two assets, Asset A and Asset B, with the following characteristics:
The goal is to determine the optimal allocation between Asset A and Asset B that maximizes the Sharpe Ratio of the portfolio. After the interview, each of the four candidates submitted their proposed allocation ratios of the portfolio and other relevant data to support their decisions. The results are as follows:
| Candidate | Asset A's weight | Asset B's weight | MVaR_A | MVaR_B |
|---|---|---|---|---|
| 1 | 55% | 45% | 0.0546 | 0.0546 |
| 2 | 45% | 55% | 0.0584 | 0.0490 |
| 3 | 60% | 40% | 0.0660 | 0.0440 |
| 4 | 40% | 60% | 0.0742 | 0.0581 |
Based on the above results, which candidate should XYZ Investment Firm hire as the portfolio manager?
A
Candidate 2
B
Candidate 3
C
Candidate 4
D
Candidate 1
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