asset management
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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 - PowerPoint PPT PresentationTRANSCRIPT
Asset Management
Lecture 9
Outline for today
Black-litterman model and sensitivity in confidence
Treynor-Black vs Black-LittermanValue of active management
The Black-Litterman Model
Step 1: Estimate the covariance matrix from historical data
Step 2: Determine a baseline forecastStep 3: Integrating the manager’s private
viewsStep 4: Developing revised (posterior)
expectationsStep 5: Apply portfolio optimization
Sensitivity in confidence level
Confidence measured by standard deviation of view QPossible SD 0 0.0100 0.0173 0.0300 0.0600Variance 0 0.0015 0.0003 0.0009 0.0036
E(RB|P) 0.0190 0.0148 0.0164 0.0152 0.0143
E(RS|P) 0.0140 0.0598 0.0424 0.0556 0.0643
Figure 27.5 Sensitivity of Black-Litterman Portfolio
Performance to Confidence Level (view is correct)
Treynor-Black vs Black-Litterman
TB BL
Maximization identical
The BL Model as Icing on the TB Cake
Suppose that you have two portfolios—one for the US and one for Europe The model would be run as two separate divisions Each division would compile values of alpha
relative to their own passive portfolio Portfolios need to be optimized separately Relative performance of the two markets can be
expected to add information to the independent macro forecasts for the two economies
The BL Model as Icing on the TB Cake
Use BL to include forecasts from comparative economic and international finance analyses Replace TB alpha with BL views Example: assume only one stock in the active
portfolio Alpha, beta, E(Rm), var(Rm), var(e)
The BL Model as Icing on the TB Cake
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Use BL to include forecasts from comparative economic and international finance analyses Input list for BL model
TttetRatRSCL M ),()()(:
The BL Model as Icing on the TB Cake
Use BL to include forecasts from comparative economic and international finance analyses Calculate the conditional expected return will give
you the same results as from the TB model: The realized abnormal return of time T
The precision of record, t<T
Adjust
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The BL Model as Icing on the TB Cake
The BL model could be viewed as a generalization of the TB model
Differences?
Treynor-Black vs Black-Litterman
TB BL
Maximization identical
input Individual security analysis
Views of relative performance
target Security analysis with adjustment of forecasts
Asset allocation where relative performance is relevant.
Value of Active Management
Model for estimation of potential fees Kane, Marcus, and Trippi (JPM, 1999) The percentage fee, f, that investors would be willing
to pay for active services
Source of the power of the active portfolio the squared information ratios
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Remember f is in addition to what an index fund would charge.
Concluding Remarks
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.