Consider the following Table of information: Table: Annual return forecasts Index components Weight Expected return Variance...

 

Transcribed Image Text:

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?

Answer rating: 100% (QA)

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