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Unformatted text preview: estor views (forecasts)
description of types of views (asset, spread, ...) W: uncertainty in views RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/11/2012. © P. KOLM. 10 Market Equilibrium Basic assumption: unless the investor has a specific view on a security, its
expected return should be consistent with market equilibrium No views → Hold market portfolio
Our starting point is CAPM E(Ri )  Rf = bi (E(RM )  Rf )
where bi = cov(Ri , RM )
2
sM RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/11/2012. © P. KOLM. 11 Denote by wb = (wb1,..., wbN ) the market capitalization (or benchmark) weights, so
that the return on the market can be expressed
N RM = åwbi Ri
i =1 By CAPM, the expected excess return on asset i becomes pi = bi (E(RM )  Rf )
=
= Defining d = E (RM )  Rf
2
M s cov(Ri , RM )
2
M s
E (RM )  Rf
2
M s (E(R M )  Rf ) N å cov(R , R )w
i j bj j =1 (market price of risk), we write CAPM as (matrix vector form)
p = dSw RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/11/2012. © P. KOLM. 12 Some Remarks Given market capitalization weights, market price of risk and a covariance
matrix: Determining p by calculating p = dSw is called “reverse optimization”3 p is referred to as the “market implied expected returns” or “equilibrium implied expected r...
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This document was uploaded on 02/17/2014 for the course COURANT G63.2751.0 at NYU.
 Fall '14

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