Black Something - Schweser Missed It Last Year

obelix Wrote: ------------------------------------------------------- > bigwilly Wrote: > -------------------------------------------------- > ----- > > I never said “Global Equilibrium Index”, I said > a > > Global Index. Which would be an index that > > incorporates all the different asset classes > from > > around the world…a Perfect Global Index > doesn’t > > exist, but for Equities I guess you could use > the > > MSCI ACWI. I’m not BL expert so I dont know. > > > Ok! I take “Equilibrium” back from my sentence. As > far as I remember book (Schweser) talks about the > equilibrium return on Global Market Index. So, my > question was what exactly they mean by Global. I > know there is nothing called universal acceptable > index. Based on information I can think of it as a > Custom Index. But, the question is how MVO is > plotted if we assume there is only one custom > index based on manager’s expectations (one data > point). I don’t remember if CFAI book has covered > it or not (I mean how detailed). May be I am > overly reacting when there are lot of other topics > to work on. You actually assume that the Global index is the Highest Sharpe Ratio portfolio.

You’re right, Index mkt weights and Covariances need to be an input to back into the returns.

So how does it backsolves it ?

Reverse Optimization… I assume almost like Return Based Scenario Analysis works. Its a computer program that does it :slight_smile:

you start with standard deviations of the asset classes and their weights, covariances and calculate the standard deviation of the global index Then using this standard deviation and the implied market return for the index, you get the Sharpe ratio for the index. finally you apply CAPM to get the expected return for each asset: Er = Rf + Stdevi * Corr(i,m) * Sharpe Ratio (m) I am not sure at what stage investor opinions are integrated into this process, but there are tons of references online.

what is an implied market return? Is it historical return?

It’s the return the BL reverse optimization model spits out based on its weight and covariance with the Index historical returns. It’s different than historical returns b/c its not the actual returns.

It’s not based on historical, that’s probably where the investor opinion comes, or maybe fundamental index valuation.

Don’t worry about it, a computer program does all this for you. :wink: Just remember the main points and advantages/disadvantages.

It’s actually a cool model, very easy to program on mathematica or matlab, it’s just a bunch of matrix operations. It’s on my to do list after the exam.

lol

It was well covered in Schweser 2007 notes. Moreover and it was tested in BSAS exam for that year, however under exam stress and time pressure you will miss some questons even if you know.

http://www.styleadvisor.com/resources/newsletters/BLForecast.html it requires a risk premium as an input, which is also subjectives.

BL was in last year’s Schweser the tricky thing thing at the exam however was that the question asked for the inputs to the model and was about the model itself ie describing the model gave zero points

it’s there this year in schweser as well, albeit coverage is scant…

Bambi Wrote: ------------------------------------------------------- > BL was in last year’s Schweser > the tricky thing thing at the exam however was > that the question asked for the inputs to the > model and was about the model itself ie describing > the model gave zero points well… zero points… Just thinking about the model you can guess that those inputs will be current mkt caps to derive expected returns from them, personal views, covariances… I am sure I am missing more, but at least you should get some score rather than zero, right?

stds/cov/weights/risk premium - required inputs

risk premium is an input… or an output you get from current mkt weights? where did you get this list from? thx

http://www.styleadvisor.com/resources/newsletters/BLForecast.html Says risk premium is an input

Sorry, it is called Risk Aversion Coefficient