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The investor has one personal view: She expects the second asset to outperform the first by 3 % on average. However, the investor is not

The investor has one personal view: She expects the second asset to outperform the first
by 3% on average. However, the investor is not certain with her prediction such that the
error in her prediction has the standard normal distribution i.e N(0,1). Compute
the Black-Litterman estimate of expected return for the investor. (5 marks)
b) Let the model of the returns be given as
rt=+t
where inRN is the unknown true mean vector and tinRN is a multivariate i.i.d process
with zero mean and constant covariance matrix. Assuming that rtN(,), derive the
Maximum Likelihood estimators for and .(6 marks)
c) Consider the following utility function U()= for 01. Show that U(w) has
declining absolute risk aversion and constant relative risk aversion (4 marks)
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