Q3 Consider the following Table of information Table : Annual return forecasts Benchmark Index Component wp Equilibrium model expected return Variance Correlation Stocks 0.75 0.0681 0.0289 0.3 Bonds 0.25 0.0140 0.0064 Note: The average coefficient of risk-aversion of market is 3. The variance of the equilibrium model expected returns is 10% of the sample variance. Managers 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? 7 c) What is the posterior expectations after incorporating the managers view?