There are 2 risky assets in the market, A and B. The information and CAPM estimates for
Fantastic news! We've Found the answer you've been seeking!
Question:
There are 2 risky assets in the market, A and B. The information and CAPM estimates for A and B are:
A: market cap=100m, variance= 0.09
B: market cap=400m, variance= 0.01
covariance between A and B = 0.2
expected market return = 20%
risk free rate = 10%
the manager believes that B will outperform A by 5% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the CAPM model in terms of variance to be 0.01
a) what is the expected return of A and B under CAPM?
b) What is the average risk aversion index of the market?
c) Express the portfolio manager's
view in mathematical form (Black-Litterman model)
d) What is the Black-Litterman
adjusted values of expected return of the market?
Posted Date: