The portfolio manager needs to select the asset that meets two conditions: 1) Its Jensen's alpha must be greater than or equal to the market risk premium (MRP). 2) Among those that qualify, it must have the lowest marginal VaR.

Step 1: Calculate the Market Risk Premium (MRP) $MRP = Market Return - Risk Free Rate = 8\\% - 3\\% = 5\\%$

Step 2: Calculate Jensen's Alpha for each asset The formula for Jensen's alpha is $\\alpha_i = R_i - [R_f + \\beta_i \\times (R_m - R_f)]$

• Asset BDE: $\\alpha = 14\\% - [3\\% + 1.20 \\times 5\\%] = 14\\% - 9\\% = 5\\%$
• Asset JKL: $\\alpha = 13\\% - [3\\% + 0.90 \\times 5\\%] = 13\\% - 7.5\\% = 5.5\\%$
• Asset MNO: $\\alpha = 13\\% - [3\\% + 1.00 \\times 5\\%] = 13\\% - 8\\% = 5\\%$
• Asset STU: $\\alpha = 10\\% - [3\\% + 0.80 \\times 5\\%] = 10\\% - 7\\% = 3\\%$

Assets BDE, JKL, and MNO have an alpha $\\ge 5\\%$. Asset STU has an alpha of $3\%$ and is therefore eliminated.

Step 3: Determine the lowest Marginal VaR Marginal VaR represents the change in the portfolio's total VaR resulting from a small change in the portfolio weight of an individual asset. Mathematically, the Marginal VaR of an asset is directly proportional to its beta relative to the portfolio ($Marginal VaR_i = \\frac{VaR_p}{W_p} \\times \\beta_{i,p}$). Therefore, the asset with the lowest beta to the portfolio will contribute the lowest marginal VaR. Comparing the betas of the eligible assets:

• BDE: 1.20
• JKL: 0.90
• MNO: 1.00

Asset JKL has the lowest beta (0.90) and therefore the lowest marginal VaR among the qualifying assets.

Conclusion: Asset JKL should be selected.