a. You want to find the optimal portfolio allocation of a risk-averse investor across 5 broad...

 

Transcribed Image Text:

a. You want to find the optimal portfolio allocation of a risk-averse investor across 5 broad world indices that together compose the global equity portfolio: Americas, Europe, Asia Pacific, Middle East, and Africa. What ingredients would you need (what data and what parameters) if you were using a simple mean-variance optimization model to solve your allocation problem? (5 marks) b. what advantages would the Black-Litterman (BL) model give you over the portfolio optimization method used in part (a)? (7 marks) c. How would you derive your vector of prior beliefs П, the implied vector of equilibrium excess returns for the 5 country indices? What would be your optimal weights on the 5 indices if you agreed with these expectations? (7 marks) d. Assume that the market capitalization weight of Europe in the global market index is 25%. You apply the BL model expressing your own subjective views about the expected return on Europe; you use a parameter T-0.05 (remember that T is the parameter that scales the variance of your prior belief, TZ). As a result of this optimization process, you find an optimal BL weight of 20%. What is the shift in the portfolio weight on Europe that is due to your own subjective views about the return of Europe? (6 marks) a. You want to find the optimal portfolio allocation of a risk-averse investor across 5 broad world indices that together compose the global equity portfolio: Americas, Europe, Asia Pacific, Middle East, and Africa. What ingredients would you need (what data and what parameters) if you were using a simple mean-variance optimization model to solve your allocation problem? (5 marks) b. what advantages would the Black-Litterman (BL) model give you over the portfolio optimization method used in part (a)? (7 marks) c. How would you derive your vector of prior beliefs П, the implied vector of equilibrium excess returns for the 5 country indices? What would be your optimal weights on the 5 indices if you agreed with these expectations? (7 marks) d. Assume that the market capitalization weight of Europe in the global market index is 25%. You apply the BL model expressing your own subjective views about the expected return on Europe; you use a parameter T-0.05 (remember that T is the parameter that scales the variance of your prior belief, TZ). As a result of this optimization process, you find an optimal BL weight of 20%. What is the shift in the portfolio weight on Europe that is due to your own subjective views about the return of Europe? (6 marks)

Answer rating: 100% (QA)

a To solve the portfolio allocation problem using a simple meanvariance optimization model you would need the following ingredients 1 Returns data Historical returns for the 5 broad world indices Amer... View the full answer