Extreme Events – Specimen Question A.6.2
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Question and Answer Summary
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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