Asset Management. Lecture 9. Outline for today. Black-litterman model and sensitivity in confidence Treynor-Black vs Black-Litterman Value of active management. The Black-Litterman Model. Step 1: Estimate the covariance matrix from historical data Step 2: Determine a baseline forecast
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Step 1: Estimate the covariance matrix from historical data
Step 2: Determine a baseline forecast
Step 3: Integrating the manager’s private views
Step 4: Developing revised (posterior) expectations
Step 5: Apply portfolio optimization
Remember f is in addition to what an index fund would charge.
The gap between theory and practice has been narrowing in recent years
TB model is sensitive to large alpha values
BL model relies on the “confidence” level which is often ambiguous.