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Extreme Events – Specimen Question A.6.2

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You are an asset allocator selecting between five different asset categories as per A.5.1 and you believe that the covariances between the asset categories are as set out in A.5.1. The ‘market’ involves the following asset mix and is viewed as implicitly involving a minimum risk portfolio which is 100% invested in asset class A1. The mandate does not allow short sales.

 

 

Market mix (%)

Your views relative to those implicit in the market mix

A1

10

-0.5

A2

15

0.0

A3

20

+0.5

A4

30

-0.5

A5

15

+0.5

 

(a)    Set out how you would use the Black-Litterman approach to identify a robust optimal asset mix for the portfolio.

 

Answer/Hints

 

(b)   What additional information would you need before you could decide what is the most suitable asset allocation for this portfolio?

 

Answer/Hints

 

(c)    Making plausible assumptions about this additional information, suggest a suitable asset allocation for this portfolio. Ideally create a spreadsheet that takes this information as an input and selects the most suitable asset allocation given this information.

 

Answer/Hints

 

(d)   Set out a series of return and covariance assumptions which results in the same mean-variance asset allocation as in (c) but without using the Black-Litterman methodology.

 

Answer/Hints

 


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