Black Litterman and Robust Portfolio Optimization

In this case the black litterman expected returns

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Unformatted text preview: 16 Intuition Behind Black-Litterman Assume one asset and one view, then the Black-Litterman expected excess returns are E BL (R ) = 1 -1 (tS) + W-1 -1 é ù tS) p + W-1q ú ê( êë úû -1 = qp + (1 - q )q with q = (tS) (tS) + W -1 -1 The more confident we are in equilibrium (i.e., lower t ), the larger the weight on equilibrium With no views: the Black-Litterman expected returns equal market equilibrium expected returns With no equilibrium: the investor must have as many views as there are assets. In this case the Black-Litterman expected returns exactly reflect the views (cf. classical M-V) RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/11/2012. © P. KOLM. 17 Portfolio Optimization with the B-L Model B-L ERs: When no views are expressed, optimal portfolio weights are equivalent to the weights of the market portfolio When equilibrium is not incorporated in the Black-Litterman model, the optimal portfolio may have extreme weights on certain assets Benchmark selection and risk aversion are outside the scope of this presentation Which covariance matrix do we use? RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/11/2012. © P. KOLM. 18 Brief Overview of Robust Portfolio Optimization RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/11/2012. ...
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This document was uploaded on 02/17/2014 for the course COURANT G63.2751.0 at NYU.

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