Consider the following Table of information: Table: Annual return forecasts Index components Weight Expected return Variance...
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Consider the following Table of information: Table: Annual return forecasts Index components Weight Expected return Variance Correlation Stock 75% 6.81% 0.0289 Bonds 25% 1.40% 0.0064 0.3 The average coefficient of risk-aversion of market is 3. The variance of the equilibrium model expected returns is 10% of the sample variance. Manager's view: The manager believes that in the next month, bonds will outperform stocks by 0.5% with estimation standard error 1.73%. a) What are the advantages of the Black-Litterman model over the Markowitz model? b) In this model, how do you express the confidence of the manager in his/her view? How do you represent the managers view with error representation mathematically? c) What is the posterior expectations after incorporating the manager's view? Consider the following Table of information: Table: Annual return forecasts Index components Weight Expected return Variance Correlation Stock 75% 6.81% 0.0289 Bonds 25% 1.40% 0.0064 0.3 The average coefficient of risk-aversion of market is 3. The variance of the equilibrium model expected returns is 10% of the sample variance. Manager's view: The manager believes that in the next month, bonds will outperform stocks by 0.5% with estimation standard error 1.73%. a) What are the advantages of the Black-Litterman model over the Markowitz model? b) In this model, how do you express the confidence of the manager in his/her view? How do you represent the managers view with error representation mathematically? c) What is the posterior expectations after incorporating the manager's view?
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a The BlackLitterman model has several advantages over the Markowitz model Firstly it incorporates investor views of expected returns which allows for ... View the full answer
Related Book For
Statistical Reasoning for Everyday Life
ISBN: 978-0321817624
4th edition
Authors: Jeff Bennett, Bill Briggs, Mario F. Triola
Posted Date:
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