Black-litterman model

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Reference no: EM131004183

Investments Course

Task description

Apply the Black-Litterman model in a standard mean-tracking error framework, with a risk aversion parameter equal to 1.50, for the last 12 months, by using a historical returns window (for the moments computation) of 48 monthly observations. The benchmark is the following:

Euro Area Government Bond  Merrill Lynch EMU Direct Government Index 10.00% 
United States Government Bond  Merrill Lynch U.S. Treasuries Index 15.00% 
Japan Government Bond  Merrill Lynch Japanese Governments Index 5.00% 
United Kingdom Government Bond  Merrill Lynch U.K. Gilts Index 3.00% 
Global Emerging Markets Bonds  Merrill Lynch Sovereign Emerging Markets Index 2.00% 
Euro Area Corporate (Inv. Grade) Bonds  Merrill Lynch EMU Corporates Index 3.00% 
United States Corporate (Inv. Grade) Bonds  Merrill Lynch U.S. Corporates Index 3.00% 
Japan Corporate (Inv. Grade) Bonds  Merrill Lynch Japan Corporates Index 1.00% 
United Kingdom Corporate (Inv. Grade) Bonds  Merrill Lynch U.K. Corporates Index 1.00% 
Global High Yield Bonds  Merrill Lynch Global High Yield Index 0.00% 
Euro Area Equity  MSCI EMU 14.00% 
Europe Ex Euro Area Equity  MSCI Europe Ex EMU 12.00% 
Asia/Pacific Equity  MSCI Asia/Pacific 10.00% 
North America Equity  MSCI North America 16.00% 
Emerging Markets Equity  MSCI Emerging Markets Free 5.00%

The views (they do not change over the out-of-sample period) are:

1. Equity markets will outperform government bond markets by an annualized 3.00%;

2. Corporate bond markets will outperform government bond markets by an annualized 1.00%;

3. European (Euro Area and Europe Ex Euro Area) equity markets will outperform Asian equity markets by 2.00% a year;

4. Emerging equity markets will outperform developed equity markets (European, North American and Asian) by 1.00% a year.

For all the views the degree of confidence is 90.00%.

Steps to take:

a. Theoretical background (Black-Litterman Model);

b. Model implementation;

c. Comment results (Indicators of Risk, Return, Risk-Adjusted Performance, etc. e.g. Information Ratio, Sharpe Ratio, Sortino Ratio, Treynor Ratio, etc.);

d. Appendix 1: Program Codes (Matlab).

Reference no: EM131004183

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