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).