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(The Black-Litterman Model). An investor has chosen four assets with the fol- lowing annual implied equilibrium excess returns (risk premiums) and the covari- ance matrix
(The Black-Litterman Model). An investor has chosen four assets with the fol- lowing annual implied equilibrium excess returns (risk premiums) and the covari- ance matrix II 0.054,0.072, 0.038, 0.037 0.06 0.063 0.023 0.033 0.063 0.09 0.043 0.04 0.023 0.043 0.035 0.02 0.033 0.04 0.02 0.028 The risk free rate is 4% The investor has three views on asset 1 and 2: View 1: Asset 1 will outp View 2: Asset 2 will outperform Asset 1 by 1.5%. View 3: Asset 3 will underperform Asset 4 by 0.5% the market consensus by 0.5%; With an uncertainty matrix 0.0762 0 0 | 0 0.0305 0 0 0 0.0512 (a) Calculate the optimal weights of the tangency portfolio of the four assets. (b) Express the investor's own views using a matrix. (c) Calculate the optimal weights using the Black-Litterman model. (The Black-Litterman Model). An investor has chosen four assets with the fol- lowing annual implied equilibrium excess returns (risk premiums) and the covari- ance matrix II 0.054,0.072, 0.038, 0.037 0.06 0.063 0.023 0.033 0.063 0.09 0.043 0.04 0.023 0.043 0.035 0.02 0.033 0.04 0.02 0.028 The risk free rate is 4% The investor has three views on asset 1 and 2: View 1: Asset 1 will outp View 2: Asset 2 will outperform Asset 1 by 1.5%. View 3: Asset 3 will underperform Asset 4 by 0.5% the market consensus by 0.5%; With an uncertainty matrix 0.0762 0 0 | 0 0.0305 0 0 0 0.0512 (a) Calculate the optimal weights of the tangency portfolio of the four assets. (b) Express the investor's own views using a matrix. (c) Calculate the optimal weights using the Black-Litterman model
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