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:

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).