Problem 6 (Black-Litterman). Consider a market with one risk-free asset and three global assets: stock market...
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Problem 6 (Black-Litterman). Consider a market with one risk-free asset and three global assets: stock market A, B, and C. The market capitalizations of these three assets are 30, 15, and 10 billion, respectively. The covariance matrix of the returns of these three assets are estimated as follows: A B A 8% 2% 3% B 2% 5% 1% C 3% 1% 2% The market risk premium is estimated to be 5%. Suppose an investor applies the Black-Litterman model to compute the optimal allocation to stock market A, B, and C. Assume his risk aversion degree 1/5. Assume 7 = 0.1, 1, and 10, and P = ( 1 ), 10 q= (3%) 12 = ((1%) (25%)). 0 0 2% 2 Problem 6 (Black-Litterman). Consider a market with one risk-free asset and three global assets: stock market A, B, and C. The market capitalizations of these three assets are 30, 15, and 10 billion, respectively. The covariance matrix of the returns of these three assets are estimated as follows: A B A 8% 2% 3% B 2% 5% 1% C 3% 1% 2% The market risk premium is estimated to be 5%. Suppose an investor applies the Black-Litterman model to compute the optimal allocation to stock market A, B, and C. Assume his risk aversion degree 1/5. Assume 7 = 0.1, 1, and 10, and P = ( 1 ), 10 q= (3%) 12 = ((1%) (25%)). 0 0 2% 2
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